Published in the 18 February 2007 issue of The News on Sunday
http://www.jang.com.pk/thenews/feb2007-weekly/nos-18-02-2007/pol1.htm#4
Taimur Malik
There has been much talk in the recent past about a Pakistan-US Bilateral Investment Treaty (BIT) and many US officials including Frank Lavin, the US under secretary for international trade, have assured Prime Minister Shaukat Aziz of progress in this regard. While some are enthusiastic about the benefits that may flow from the inking of the agreement, others are a little sceptical about its advantages.
It is interesting to note that the first ever BIT was signed between West Germany and Pakistan in 1959. Germany in the post world war scenario having lost most of its international investments sought to protect its future investments abroad and therefore actively undertook investment agreements and to date remains the country with the highest number of the BIT agreements.
The need for such agreements also arose from the desire of the investors to be afforded protection by governments. The lobbying of the Anglo-Iranian oil companies to seek assurances and protection under a BIT from their countries in 1960s led to an increasing number of such agreements, mostly between Western European and developing countries. The stimulating factor was obviously the desire for more protection by the ‘big western companies’ in the developing countries.
The developing countries look at these BITs as the solution to their problem and believe that if they sign these agreements foreign investment shall flow in. However, there is little empirical evidence to suggest that there is a link between BITs and new investments, although they do suggest a policy approach geared towards ensuring protection for foreign investment and thus convey a positive signal to the investors.
According to Jennifer Tobin and Susan Rose-Ackerman of Yale University, the number of BITs signed appears to have little impact on a country’s ability to attract Foreign Direct Investment (FDI). Their study also shows that in the case of US BITs, the reduction of political risk in the host country may lead to an increased FDI from the US.
It’s in this perspective that we need to see the US promises to sign a BIT with Pakistan. The ultimate objective of the Pakistani government is to enter into a Free Trade Agreement (FTA) with the US. But the provision of preferred treatment under an FTA to investors from a particular country, as a BIT guarantees, is in fact contrary to the non-discrimination principle of the World Trade Organization (WTO). This principal is enshrined in the Most Favoured Nation (MFN) rule of the WTO which provides that a member state should extend the same favourable treatment to all other member states of the WTO which it grants to any one member state. There is a growing jurisprudential debate on this issue, but owing to the benefits offered by the increasing number of FTAs, and partly due to a very slow progress in negotiations towards a multilateral international trade agreement at WTO, the organization has chosen to encourage such agreements.
The developing countries face a serious problem when it comes to negotiating BITs and FTAs in an informed manner due to a lack of specialist investment legal expertise. What mostly happens is that they are presented with older European/North American models to base their agreements upon and while these offer the desired investor protection, they do little in terms of protecting the developing state’s rights and national interests.
The model US BIT provides for the right of the investor to transfer all earnings to the investing country. This provision is for the benefit of the US investors who are used to the free movement of cash but may have implications for a developing economy such as Pakistan as the US investors may be tempted to withdraw their investments at the first signs of any risk in the country. In Pakistan’s case, however, the Board of Investment’s Foreign Direct Investment (FDI) policy already provides the foreign investors this incentive to encourage them to invest in the country.
Most BITs also contain clauses that allow the investors to lodge legal claims against the host government for damages resulting from environmental and health regulations enacted after the investment took place, which have an impact on the cost of the investors’ business operations in the host country. Developing countries need to retain the right to enact new laws in these areas from time to time to achieve gradual progression towards the standards existing in developed countries.
It’s not a surprises that the majority of international investment disputes are against developing or under-developed countries. The average cost of defending a claim runs into millions of dollars. Most BITs provide for dispute resolution methods preferred by the investors. The developing countries thus face the prospect of very expensive international dispute settlements in the face of any claims. The World Bank’s International Centre for the Settlement of Investment Disputes (ICSID) is the favourite forum in most BITs for investor-state dispute settlement.
Pakistan recently ratified the New York convention on the Recognition and Enforcement of Foreign Arbitral Awards, which came into force in October 2005. There has been some discussion about setting up a National Arbitration Centre as well. These steps enhance investor confidence in the country and are viewed by foreign investors as positive steps towards creating a stable and more investor friendly trade regime. Since Pakistan is a party to the New York Convention now, the local courts are obliged to enforce arbitration awards rendered abroad against Pakistani entities and no appeal against the award may be admitted except only in very limited circumstances. This diminishes the need for foreign investors to get entangled in protracted legal battles in domestic courts and makes the option of investing in countries like Pakistan more attractive.
The proposed US-Pakistan FTA/BIT posses the same model for Pakistan and it can be said that Pakistan has little latitude in negotiating the agreements, which may mean, among other things, agreeing to expensive dispute settlement methods on international forums. Since there is a lack of home grown legal knowledge in this field, the costs for hiring international lawyers in such circumstances raises the costs for countries like Pakistan.
Moreover, the concept of ‘pre-establishment’ rights given in most US BITs is likely to afford greater protection to US nationals and companies investing in Pakistan. Any policy changes affecting these investments by Pakistan even in the wake of national public policy interest may lead to compensation claims against Pakistan.
Similarly, the Most-Favoured Nation (MFN) status clause in BITs has been referred to as ‘multilateralism through the backdoor’ partly due to the ability of international lawyers to allow their clients from third countries to benefit from protection and dispute resolution clauses in a BIT. This means that companies registered in the US but owned by nationals of other countries may be able to obtain the benefit of international dispute settlement clauses under the Pakistan-US BIT for resolution of their investment disputes and to demand increased investment protection rights provided for under the BIT. Even Pakistani citizens may be able to avoid the lengthy local judicial process and seek protection under the BIT by establishing companies in a country with which Pakistan has signed a BIT. This could entail expensive legal battles for the government at international forums.
Additionally, the FTA clauses on government procurement cover the market access aspects, that is, enabling foreign companies to bid on equal terms with local companies for government contracts. This would drastically limit or eliminate policy space for the developing-country government to give preferential treatment to local companies and persons, and thereby lose a crucial instrument for boosting domestic economy. Also, the requirement to treat foreign goods, services and firms at par with domestic goods, services and firms can also result in loss of market share for the local firms as well as loss of foreign exchange for the local economy.
The intellectual property clauses of the proposed agreement with the US are also a reason for the delay in its finalisation. According to news reports, United States has decided to remove Pakistan from its 2006 intellectual property rights (IPR) priority watch list due to improvement undertaken by Islamabad during the last 12 months. According to US Trade Representative Rob Portman, United States has closed its review of a petition from the US private sector questioning Pakistan’s eligibility for preferential tariffs under the Generalized System of Preferences (GSP) programme because Pakistan has made significant progress in the protection of intellectual property rights. It is pertinent to mention here that in 2004, Pakistan exported products worth more than $94 million duty-free to the United States through the GSP programme.
Pakistan may perhaps stand to benefit from an FTA with the US. But the negotiators need to be aware and protective of Pakistan’s interests as well as legislative, social and economic needs, especially when there is hardly any empirical evidence to suggest that FTAs result in an increase in the FDI. Perhaps this is one reason that the officials of the two governments have not reached a consensus on these agreements as yet.
Pakistan, in the meanwhile, has been actively negotiating and signing free trade agreements and bilateral investment treaties for the last few years with countries as diverse as Sri Lanka and China. It remains to be seen if these have made any positive impact on the country’s economy.