Industrial policy measures and sustainability in international investment agreements

September 21, 2018

States now face two competing – and strengthening – influences with respect to industrial policy: heightened scrutiny of industrial policy measures and heightened expectations for achieving sustainable development.

With increasing frequency, states are addressing and balancing those competing policy influences in international investment agreements (IIAs).

By adopting a “WTO plus” approach to industrial policy measures in IIAs, states can provide detailed guidance on how IIA obligations should be applied to strategic industrial policy measures aimed at advancing economic development and how the policy goal of sustainability should affect that analysis.

Industrial policies have become ubiquitous, as characterised by the 2018 UNCTAD World Investment Report. With the ascendance of sustainability as a policy priority, industrial policies have also taken on particular importance as tools for advancing sustainable development and capacity building. At the same time, however, industrial policies have become increasingly controversial, as illustrated by China’s Made in China 2025 plan, which has been heavily scrutinised in many jurisdictions.

Given these developments, states now face two competing – and strengthening – influences with respect to industrial policy: heightened scrutiny of industrial policy measures and heightened expectations for achieving sustainable development. With increasing frequency, states are addressing, and balancing, those competing policy influences in international investment agreements (IIAs).

Evolving approaches in IIAs

Older IIAs rarely addressed industrial policy measures.  Under this “silent” approach to industrial policy, investors alleging harm caused by such measures would need to turn to other existing IIA obligations – such as national treatment and fair and equitable treatment – for protection.

Some IIAs have addressed a narrow set of industrial policy measures by incorporating World Trade Organization (WTO) disciplines into the treaty, in particular limitations on performance requirements under the WTO Agreement on Trade-Related Investment Measures (TRIMs). Because key areas of industrial policy such as technology transfers and services fall outside the scope of these disciplines, a “WTO” approach to industrial policy measures in IIAs does not allow states to provide detailed guidance on balancing competing policy interests.

By adopting a “WTO plus” approach, states can provide such guidance, balancing the need to scrutinise a wide range of industrial policy measures (given risks that include nationality-based discrimination, trade and investment distortions, and infringement of intellectual property rights) with the need to rely on industrial policy measures to help advance economic development generally and sustainable development in particular.

The WTO plus approach

Many recent IIAs have adopted such a WTO plus approach to industrial policy. These treaties both constrain (through disciplines) and support (through exceptions) industrial policy measures. But the particular balance struck on industrial policy varies significantly from treaty to treaty.

For example, the Comprehensive and Progressive Agreement for Trans Pacific Partnership, the Additional Protocol to the Framework Agreement of the Pacific Alliance, the Canada-EU Comprehensive Economic and Trade Agreement, and the Singapore-Australia Free Trade Agreement each include detailed restrictions on various forms of performance requirements, such as requirements that an investor transfer a technology or other proprietary knowledge in order to operate an investment.

By contrast, the amended Southern African Development Community (SADC) Protocol on Finance and Investment includes, in its preamble, an objective to stimulate “investment flows and technology transfer and innovation” into the SADC region and expressly authorises parties to “grant preferential treatment to domestic investments and investors in order to achieve national development objectives.”

Such detailed guidance by policymakers is particularly valuable as industrial policy measures now face greater scrutiny while, at the same time, playing an increasingly significant role in the advancement of sustainable development. In this way, the IIA-industrial policy relationship has become both more important and less predictable.

This is also evident in recent investment arbitration practice: tribunals have been applying IIA obligations to industrial policy measures with greater frequency, including dozens of claims submitted to arbitration under IIAs concerning regulatory adjustments to incentives in the renewable energy sector made by certain EU member states.

For tribunals applying IIA obligations to industrial policy measures, the policy goal of sustainability raises particularly challenging issues because sustainability concerns blur distinctions between regulatory and strategic measures. For example, green industrial policy measures are intended to advance both regulatory goals (protecting the environment) and strategic goals (developing green industries). This distinction is important because investment arbitration tribunals accord significant deference to regulatory measures, while the deference that should be accorded to strategic measures is far less settled.

Guidance and reduced uncertainty

By adopting a WTO plus approach to industrial policy measures in IIAs, states can provide guidance on the two aspects of the IIA-industrial policy relationship that are most in need of clarification: first, how IIA obligations should be applied to strategic industrial policy measures aimed at advancing economic development, and second, how the policy goal of sustainability, when applicable, should affect that analysis.

Providing such guidance in IIAs can reduce uncertainty for states agreeing to IIA obligations, for tribunals applying IIA obligations to industrial policy measures, and for investors considering potential investments abroad.

This post is derived from the forthcoming paper International Investment Obligations and Industrial Policy authored by Marc Feldman and commissioned by ICTSD.

Mark Feldman is Professor of Law at Peking University School of Transnational Law.

Topics: INVESTMENT RTA EXCHANGE INDUSTRIAL POLICY

Authors: MARK FELDMAN

RTA

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