Foreign direct investment
Providing assurance against foreign investment risks
Published 30 June 2017
The U.S. Constitution guarantees that no person may be “deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.” But what we take for granted in the US isn’t always the case when doing business abroad.
Companies Take Risks Investing Overseas
We take for granted that the government can’t just take our property – at least without paying us. And if it tries, we know we can sue in the courts to seek compensation. The U.S. Constitution guarantees that no person may be “deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.” But what we take for granted in the United States isn’t always the case when doing business abroad.
Here’s an example. A U.S. company invests in setting up wind and solar energy installations overseas, but then the host government changes policies, deciding it would rather take the installations and run them itself – or hand them over to a politically connected local business – without providing any compensation. If the legal regime of the country is weak, the rights of the company may not be clear. Resorting to local courts may not be an effective option. What is the company to do?
In the past, the company would have been forced to ask the U.S. government for help, but the U.S. government is not always willing and able to pursue such claims in a government-to-government fight, or the case might get dropped in favor other bilateral priorities. Over the past 50 years, governments have been negotiating investment agreements intended to help overcome such limitations, and to ensure that investors have more options at their disposal to resolve risks to their investments when problems arise.
Investment Agreements Provide Assurances Found in U.S. Law
Investment agreements have taken the form of stand-alone bilateral investment treaties (BITs) and investment chapters in free trade agreements. Regardless of the form, they typically include commitments that foreign investors will be treated the same as domestic or third-country investors, that investors will receive compensation if their property is taken, that investors will not be treated in an arbitrary and unfair matter, and that investors will have the right to move capital in and out of a country.
These basic commitments match those already found in U.S. law, as well as in international law. In addition, investment agreements often include arbitration procedures providing investors a process to enforce these commitments, much as investors in the United States can directly challenge government measures in U.S. courts. These arbitration procedures are known as investor-state dispute settlement (ISDS) procedures.
Raising the Bar Attracts More Investment
Why do countries agree to take on commitments in investment agreements? In general, they provide assurances to investors that a country is a safe place to invest and do business. They help to raise the level of legal protections in many emerging markets to international standards. By including ISDS procedures, investment agreements give comfort to investors that they will have access to processes for resolving disputes relating to their investments that are comparable to processes in countries with well-developed legal regimes such as the United States.
So why do countries with well-developed legal systems like the United States take on such commitments? In short, investment agreements provide a relatively cost-free means of raising global standards to protect their investors. These commitments are already reflected in U.S. law, but by agreeing to ISDS arbitration procedures, our investment agreement partners have incentive to adopt them as well.
Economic growth rates in emerging markets often exceed those in the United States, and by helping to create protections for U.S. businesses in those markets, investment agreements allow U.S. businesses to share in that growth. And while investor-state arbitration processes may parallel those already available in U.S. courts, they often provide a far better guarantee of a neutral, objective arbitration process than is available in the courts of many investment agreement partners.
Taking it to the Courts
ISDS provisions have garnered some criticism. Skeptics question why private investors should have the right to challenge governmental actions, and they express concern that processes will be abused to challenge legitimate government regulatory actions. However, private investors in the United States already have the right to challenge governmental actions in the U.S. courts, and they do so in numbers – thousands of instances — dwarfing the number of challenges under the 50 investment agreements to which the United States is a party.
Over the past 25 years, only 17 ISDS challenges have been brought against the United States, and the United States has won all 13 that were pursued to conclusion. This underscores the fact that investment agreements have been drafted to make clear that governments have the right to regulate, and that ISDS is not intended to interfere with that right. In any event, as in U.S. courts, the remedy in a successful ISDS action is to receive compensation for the lost value of the investment – and not to obligate a country to change its laws or regulations.
To alleviate concerns with how ISDS functions, recent investment agreements have included additional protections against potential abuses of ISDS procedures while preserving the tools in investment agreements that provide important guarantees for investors.
For Additional information:
United States Trade Representative ISDS Fact Sheet
CSIS report on ISDS
European Commission paper on ISDS
© The Hinrich Foundation. See our website Terms and Conditions for our copyright and reprint policy. All statements of fact and the views, conclusions and recommendations expressed in this publication are the sole responsibility of the author(s).