Could a Foreign Investor Use GATS Disciplines in a BIT Claim?

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Trade and Investment Policy Paper #5

Could a Foreign Investor Use GATS Disciplines in a BIT Claim?

Working Paper on GATS Negotiations on Domestic Regulation

Emily Sweeney-Samuelson and Solomon Ebere, Harrison Institute for Public Law
 
Summary

The World Trade Organization is negotiating “disciplines” on domestic regulation that could be more powerful than negotiators realize.  They could transform the GATS, the General Agreement on Trade in Services, into the first trade agreement that foreign investors enforce through claims against governments for hundreds of millions of dollars.  If so, the magnitude of disputes could change the course of development for a small state or a vulnerable economy.

Many WTO-member nations already have bilateral investment treaties (BITs) with each other, so the same service suppliers affected by the proposed disciplines are also protected as foreign investors under the BIT.  Foreign investors can bring claims directly against governments under BITs, but not under WTO agreements.  The number of new BITs has grown dramatically in the last two decades, as have investor claims against nation states.  This paper explores the possibility that if the WTO adopts the proposed disciplines, investors may be able to use them in their BIT claims to win monetary damages from governments. 

Many of the proposed GATS disciplines are analogous to investor protections under BITs as interpreted by arbitration tribunals.  Disciplines in the current draft that could strengthen an investor’s BIT claim include requirements that domestic regulations must be pre-established, based on objective and transparent criteria, and relevant to the supply of the services to which they apply.  These proposed disciplines are ambiguous, with a likely meaning that would significantly depart from the practice of most nations.  Investors could incorporate new disciplines into a BIT claim using one of several approaches.
1. Directly incorporating a WTO obligation.  The first three approaches would directly incorporate GATS disciplines for purposes of seeking monetary compensation through BIT arbitration.  We see three types of BIT clauses that foreign investors might be able to use:
    a. A more-favorable-treatment (MFT) clause, which typically incorporates treatment under domestic or international law that is “more favourable” than the BIT.
    b. An umbrella clause, which typically incorporates “any obligation” with regard to investments.
    c. A most favored nation (MFN) clause, which assures treatment no less favorable than that provided to a third-party investor (assuming that the host country is a GATS member).  Even if an investor cannot use an MFN clause to enforce GATS disciplines directly, investors have used the clause to reach a broadly worded umbrella clause in another BIT of the same country.
2. Interpreting a BIT obligation.  This approach would use GATS disciplines indirectly as evidence to support the investor’s interpretation of a BIT standard of treatment.  Investors have used WTO rules and decisions to interpret BIT obligations under National Treatment.  Investors might also be able to use GATS disciplines as evidence to support their interpretation of the minimum standard of treatment (MST) under a BIT, including fair and equitable treatment.

This paper analyzes the first three direct approaches, which appear with a wide variety of language.  Some apply only to specific investors, and some have explicit exceptions for international agreements.  Many, however, are open-ended in their wording.  Investors could claim that when a government breaches a GATS discipline, it also breaches the BIT’s more-favorable-treatment, umbrella, or MFN clause, and this would allow the investors to strengthen a claim for monetary damages.

Only a subset of the 2,600 BITs contain clauses that are open enough in their wording to allow incorporation of the GATS disciplines by arbitrators.  But if they do, MFN treatment would make them available to investors from most BIT countries.  Negotiators should analyze this BIT risk and consider their options to clarify or avoid the most far-reaching interpretations of the proposed disciplines.

Click here for the publication (38 pages, pdf, 1.5MB)