After 18 years of talks, Canada and China recently completed negotiations on an investment treaty. There has been a spirited debate in Canada over whether the treaty was a good idea. The controversy foreshadows a similar discussion in the United States, as business groups and some politicians push for a U.S.-China investment treaty.
One thing missing from the Canadian debate was an effort to squarely address some fundamental questions about such treaties: Are investment treaties the right way to liberalize foreign investment? More specifically, do investment treaties remove barriers to foreign investment, or do they, instead, mainly encourage litigation?
Before examining these questions, let’s start with a basic assumption: foreign investment, both inward and outward, is good. Investment is a fundamental driver of economic growth. The source of the investment is irrelevant, and there are few legitimate concerns with the “foreign” nature of an investment. Furthermore, when companies locate in the most efficient production area, consumers benefit and the companies becomemore viable over the long-term. Concerns about job losses from shifting production abroad (“outsourcing”) are understandable for those affected, but putting up barriers to prevent such market-based outcomes is extremely costly and cannot be sustained in the long run.
Those who disagree will certainly oppose investment treaties, as they oppose foreign investment in general. But that is a different debate. The question here is: For those who believe foreign investment is beneficial, are investment treaties a good policy tool?
In this regard, investment treaty experts have examined whetherthese treaties "promote" foreign investment. Academic studies of this issue are mixed, with conclusions ranging from a large positive impact on foreign investment to a negative impact.
Moreover, it is not clear whether they are asking the right question. If the goal is to "promote" foreign investment by increasing its amount, governments could offer subsidies to foreign investors. But this is not optimal because government subsidies distort markets, which leads to a reconsideration of the question. The goal should not be for governments to “promote” foreign investment through international treaties. Rather, it should be for governments to remove barriers to foreign investment, so that investors can decide on their own where to invest.
This leads to the question ofwhich barriers should be removed, bringing us to actual legal obligations. Consider three provisions that are found in most investment treaties.
First, these treaties usually include a provision that allows foreign investors to sue governments for alleged violations, commonly referred to as investor-state dispute settlement (investors can sue states directly). For most international legal obligations, only governments can bring a complaint, providing a filter on legal claims. With investment treaties, by contrast, foreign investors pursue litigation on their own.
In terms of the substantive obligations, there are a number of these, but consider two in particular. First, there is the “National Treatment” provision, which says, in essence, that governments should treat foreign and domestic investors equally. This obligation is consistent with the general principle that “foreign” investment is just as good as “domestic” investment, and that the nationality of the investor does not matter (aside from legitimate national-security concerns). Arguably, this provision reflects the idea that investors should be able to decide on their own where to invest, with no encouragement or discouragement from government.