Poulsen, Bonnitcha & Yackee: Costs and Benefits of an EU-USA Investment Protection Treaty

This is an important analysis from three leading scholars on the likely costs and benefits for the UK of an investment protection chapter in a proposed free trade agreement between the European Union and the United States.

From the Conclusion:

In this report, we have offered an informed qualitative assessment of the likely costs and benefits of an EU-US investment treaty as compared to a continuation of the legal status quo. As in the China report, we have not attempted to value these costs and benefits in monetary terms as we find this entirely unfeasible, even with more time and resources than were available to us. To summarise our findings, we conclude that:

(1) There is little reason to think that an EU-US investment chapter will provide the UK with significant economic benefits. No two countries in the world exchange more investment than the UK and the US, and there is no evidence that US or UK investors view either country as suffering from the kinds of political risks against which investment treaties are supposed to protect. Moreover, existing evidence suggests that the presence of an EU-US investment chapter is highly unlikely to encourage investment above and beyond what would otherwise take place. US investors have generally not taken much notice of investment treaties in the past when deciding where, and how much, to invest abroad – even when dealing with far more
questionable jurisdictions than the UK.

(2) There is little reason to think that an EU-US investment chapter will provide the UK with significant political benefits. The political relationship between Washington and Whitehall is exceptionally strong, and we are aware of no evidence that it is vulnerable to a meaningful risk of investor-state disputes that would become undesirably “politicized” in the absence of an investment treaty. Secondly, we find it unlikely that an EU-US agreement would make significant negotiating partners – like India and China – more or less willing to agree to an investment treaty with the EU. Finally, it is unclear whether the US is particularly keen on an investment protection chapter with the EU, which means the Commission may not be able to use such a chapter as an effective ‘bargaining chip’ in other trade and/or investment negotiations with Washington. However, these are all issues that BIS might wish to explore in further detail.

(3) There is some reason to expect an EU-US investment chapter will impose meaningful economic costs on the UK. Based on Canada’s experience under NAFTA, we would expect an EU-US investment chapter to be regularly invoked by US investors against the UK for governmental actions that would normally not be challengeable under UK law. While we would not expect the UK to lose many of these cases on the merits, the UK will necessarily incur costs to defend itself. Legal costs in investment treaty claims are substantial. The UK government may also find itself subject to pressure to settle some claims, even when there are reasonable prospects of successfully defending the claim on the merits. Finally, given the uncertain meaning of key elements of international investment law, it is possible that the UK would occasionally lose some arbitrations on the merits and be liable for significant damage awards.

(4) There is some reason to expect an EU-US investment chapter to impose meaningful political costs on the UK. Under investment treaties similar to a likely EU-US investment chapter, US investors have brought claims that raise potentially controversial questions. Should US investors bring similar claims against the UK, this will increase the chances that a particular dispute could provoke a backlash against the EU-US economic agreement as a whole or, perhaps more broadly, investor-state arbitration as a governing institution.

In sum, an EU-US investment chapter is likely to provide the UK with few or no benefits. On the other hand, with more than a quarter of a trillion dollars in US FDI stock, the UK exposes itself to a significant measure of costs. Using Canada’s experience under NAFTA as an example, we would expect those costs to be manageable overall, but nevertheless considerable. Unlike in the UK at the time of writing, investment treaty arbitration has become politically controversial in Canada because of the frequency and character of investor challenges to Canadian government policies, and the Canadian government has had to invest considerable resources in an investment-treaty defence capacity as a result of its more than 30 NAFTA claims. While few of these cases were lost on the merits, Canada has faced incentives to settle cases either by paying compensation or, in some reported cases, by changing government policies. We would expect the UK to have an approximately similar experience under an EU-US investment chapter, though the larger stock of US investment in Britain could imply that the UK may be subject to an even greater number of disputes – and thus potential costs – than Canada.

In none of our former reports have we made explicit policy recommendations for the UK government, and neither will we here. However, our assessment does raise questions whether the UK government might consider one of two options in negotiating an EU-US investment treaty. The first is to exclude investment protection provisions from the agreement, and solely focus on investment liberalization. Recall that to our knowledge British investors have not expressed general concerns about their legal protection in the US. A pure liberalization agreement would thereby allow the UK government to focus on the actual concerns of British investors – market access – without at the same time exposing the government to potentially expensive and controversial investment treaty claims. An alternative option is to include investment protection provisions, but exclude comprehensive ISDS from the agreement. As noted, the US (hesitantly) agreed to this in its FTA with Australia, which could provide a model for an EU-US investment treaty as well. This, too, would imply that the UK would be able to support an EU-US investment treaty overall, without being exposed to the types of investment disputes that otherwise could result in net costs for the UK government.