RESTRICTEDWORLD TRADE
ORGANIZATIONWT/WGTI/W/30
27 March 1998
(98-1242)
Working Group on the Relationship
between Trade and InvestmentOriginal:  English
COMMUNICATION FROM THE EUROPEAN COMMUNITY
AND ITS MEMBER STATES
The following communication, dated 24 March 1998, was received from the Permanent
Delegation of the European Commission with the request that it be circulated to Members.
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SUGGESTED ISSUES FOR STUDY
Identification of Common Features and Differences of Existing International
Investment Instruments from the Perspective of the European Community
and its member States (including Rights and Obligations of Home
and Host Countries and of Investors and Host Countries1
Introduction and summary
The existing international legal framework, including customary international law, relating to
investment confers rights and obligations both on home and host country of the investor or
investment, as well as on the investor as such.  This contribution is based on an analysis of the
extensive network of Bilateral Investment Treaties (BITs), which the member States of the European
Community have concluded, but also on the rights and obligations of the Community and its member
States established in other international instrument s.  It attempts to highlight some of the more
important aspects of this web of legal rights and obligations, without however presuming to give acomplete picture thereof.
Particular attention is given to issues identified so far in the Working Group as important,
notably to the need for a balance of rights and obligations for States and investors, as well as to the
implications that such obligations have for national sovereignty.
The picture to emerge from the analysis reveals that it is possible to have in place an
extensive framework of far-reaching rules on investment, while at the same time striking a fair
balance between the different, and sometimes seemingly conflicting, policy objectives of host
countries.
This balance translates into a trade off for host countries which provide, in particular,
non-discrimination and investment protection on the one hand, and benefit from the improvement ofthe investment climate enabling the attraction of investment, as well as from protection and
opportunities for its own investors doing business abroad on the other hand.
                                                     
1See Chairman's "Checklist of issues suggested for study", item IV, first and third indents
(document WT/WGTI/1/Rev.1, Annex 2)WT/WGTI/W/30
Page 2
Some of the key elements may be expressed as:
• While, there is no unqualified "right to invest" in the Community's and member
States' relations with third countries (especially in member States' BITs), there are
obligations to accord non discriminatory treatment (subject to sectoral and horizontal
reservations and exceptions aimed at preserving important policy objectives), most
strongly in the framework of the EC Treaty and EEA Agreement.
• None of the instruments the Community and its member States have concluded with
third States deprives national authorities of their sovereignty or inhibits their powers
to promote economic or regional development, take measures necessary to protect the
environment, conduct social policies or to safeguard public policy goals.
• Post-entry, Governments also remain free to regulate, subject to provisions on
non-discrimination, expropriation and transfers.  As pointed out above, strict rules on
pre-entry are rare and limited only to special relationships, such as the EEA orpre-accession, that the Community has with third States.
• Most obligations are, in any case, subject to the general exceptions on public order
and national security.
1. Host countries obligations/investors rights
A first look at existing instruments leads to a distinction along the lines of pre-entry (or
market access) and post-entry (or post-establishment) rights and obligations.  In practice, however,
such a distinction is not always easy to draw, a nd one could even question its meaning and usefulness.
1.1 Pre-entry or market access (or "right to invest")
BITs
The Bilateral Investment Treaties concluded in great number by the member States of the
Community are similar in structure, but vary in legal detail.
They do not affect the right to regulate the admission of foreign investors.  Typically,
admission (or "promotion") clauses are best effort clauses encouraging admission, and are often
qualified by provisions such as "according to each Party's laws", or "subject to" or "in exercise of its
powers conferred by law".  Neither do these BITs provide for the same right that national companieshave for making investments (national treatment).  The Parties can usually maintain any limitations or
controls on the admission that are in place, includi ng screening procedures or sectoral exclusions,
maximum equity or other control criteria, etc.
Regional and multilateral instruments
• The EC Treaty as well as the EEA Agreement grant the right of free establishment
inside the EC/EEA for nationals of member States and juridical persons incorporated
in a member State (even owned and controlled by third country nationals) when they
are doing substantial business in the host State.  Investment in one member State
under the conditions set out has therefore an effect for the entire internal market.
• Agreements which the Community and its member States have with individual third
countries (such as the Europe Agreements or the Partnership and CooperationWT/WGTI/W/30
Page 3
Agreements) provide for the freedom of Foreign Direct Investment in areas which are
open, under the agreements, to establishment.
• Other regional or multilateral agreements addressing the admission of investors to
which the Community and/or its member States have adhered include:
• The OECD Codes of Liberalization, which provide for non-discrimination
and standstill for establishment and capital movements, including ForeignDirect Investment.  All OECD countrie s, including those who are members of
the Community, have taken a few sectoral or horizontal exceptions from the
general rules (e.g. typically for transport services, telecoms, etc.).  OECD
countries also retain the right to take measures for general policy reasons
such as national security, public order.  The current negotiation in the OECD
on a Multilateral Agreement on Investment is an attempt to consolidate the
various OECD investment instruments (see also below) into one.
• The Energy Charter Treaty (ECT), which contains a "best effort" national
treatment clause for the making of investments in the Energy sector (the
making of this obligation into a binding rule is currently under negotiations in
the ECT framework:  the so-called Supplementary Treaty).
• The GATS, which contains an MFN obligation on all measures affecting the
supply of services, including in relation to the supply mode of commercial
presence (the most relevant mode of services supply for investment).  Where
a WTO Member has made a commitment for market access in a given service
sector, an absolute obligation to admit investments (including the necessary
capital movements, see footnote 8 to Article XVI GATS) in that sector istherefore undertaken.  MFN exceptions are possible and have been taken
(e.g. audiovisual sector) in sensitive fields by the Community and its member
States.
Conclusion
The network of BITs concluded by the European Community's member States does not affect
the right of the Parties to regulate the admission of investors.  However, the EC Treaty and some
important instruments the Community and its member States have adhered to put obligations on the
participants in these instruments which, taken together, amount to a very open regime for access of
investors to the European Single Market, in recognition of the benefits that liberalization brings.  In
all of these, however, horizontal or sectoral exceptions allow the participants to safeguard vitalinterests, such as national security or public order.
1.2 Treatment after admission and investor protection
BITs
All European BITs contain substantive obligations on host governments for the treatment of
investors once admitted, and strict rules for investment protection.  These obligations typically
include:
• A "general treatment" clause incorporatin g international law standards ("fair and
equitable treatment" or similar clauses).WT/WGTI/W/30
Page 4
• A national treatment/MFN obligation (which usually accords to investors and their
investments the better of national treatment or MFN in order to allow resort to
incentives for FDI).
Some BITs have exceptions to these rules, e.g. for taxation, or public order;  all exclude
measures taken in the framework of regional integration.
European BITs generally do not have sectoral exceptions, i.e. the all sectors are covered.
European BITs in addition have strict rules (without any exceptions) concerning:
• expropriation (allowed for a public purpose, and on condition of being
non-discriminatory and of prompt adequate and effective compensation in line with
customary international law);
• protection against strife;
• free transfers (of capital and returns) in convertible currency.  It should be underlined
that any transfer right is subject to the applicable deductions (e.g. taxes will have tobe paid before the obligation applies);
• dispute settlement (both investor-to-State and State-to-State);
• some member States have more refined rules which benefit investors by including in
the protection of the BIT any obligation a host country has undertaken vis-à-vis the
investor, or any better treatment from any other applicable treaty in the investors'favour.
Regional and multilateral instruments
• Within the EC/EEA, treatment after admission and investor protection are enhanced
and include, in principle, post-establishment non-discrimination and free transfer
rights also vis-à-vis third countries.  Expropriation matters and protection from strife,however, are left to member States.
• Agreements concluded by the Community and member States with individual third
countries (such as the Europe Agreements, or the Partnership and Cooperation
Agreements) provide for National Treatment and/or MFN for the post-establishment
phase as well as the freedom of transfer of investments made and any proceedsthereof.
• The OECD investment instruments addre ss post-establishment national treatment
only in the non-binding National Treatment Instrument.  There are yet no OECD
rules on expropriation, although this is addressed by customary international law.
The OECD Codes of Liberalization apply to transfers related to investments.
• The Energy Charter Treaty is the only plurilateral instrument which covers all
elements of post-establishment treatment and protection described earlier in this
section in relation to European BITs.
• The GATS has a strong post-establishment national treatment rule, but only in the
sectors scheduled, and subject to the conditions inscribed in the schedule (members
have listed many exceptions).  There are no specific expropriation rules in any of the
WTO Agreements.WT/WGTI/W/30
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Conclusion
European BITs provide strong rights for investors and strong obligations on host governments
once the investment has been admitted (standards which have been accepted also by many other
countries around the world).  This is based on the fact that a long-term involvement in the form of
foreign investment needs certainty, predictability and certain guarantees in order to balance the risk
which is part of any "going abroad".  This treatme nt is even enhanced for investments flowing to the
EC or the EEA by the more comprehensive rules of the EC Treaty and of the EEA Agreement.
Treatment of investors under other regional or mu ltilateral instruments to which the Community and
its member States are parties, instead, do not match this level of treatment.
2. Investor obligations/rights of the host government
BITs
These obligations and rights do not figure prominently in BITs (the general understanding
being that investors are subject to the law of the host country in which they operate), but they do
appear in the multilateral context.  A particular feature of these rights and obligations is that they do
not always correspond to each other (e.g. obligations  of the investors under the OECD Guidelines for
Multinational Enterprises are not rights of the host governments).
The absence of host government rights as such in the BITs does not mean that BITs create an
unbalanced situation.  In fact, investors' rights are balanced by the fact that the host government cancontinue to exercise its sovereignty to regulate all aspects of the foreign investment in its country (as
well as, of course, the admission of foreign investment in the first place).  Exceptions to this otherwise
unfettered exercise of sovereignty are limited to the subject matter of the BITs
(e.g. non-discrimination, expropriation and transfer rules have to be respected if corresponding BITs
have been concluded).
Another aspect where the balance of treatment is not obviously or explicitly expressed in
terms of strictly corresponding rights and obligations concerns environmental, social or labour
legislation, which is not affected by these obligations, since such legislation usually does notdiscriminate against foreign investment.  Vice-versa, foreign investors have to respect all national
legislation pertaining to environment or labour issues (but this is not an additional obligation:  rather,it is simply an element of non-discriminatory treatment).
Regional and multilateral instruments
• Under most regional or multinational instruments (as well as under some of the
European BITs) governments also retain their right to legislate for reasons of public
order, public health or national security.
• Other international instruments, in particular the ILO Tripartite Declaration and the
OECD Guidelines for Multinational Enterprises, are specifically addressed to
investors. They are not legally binding (see below), but spell out rather detailed
recommendations on the conduct of MNEs, e.g. regarding their information policy,
competition, financing, taxation, employment and industrial relations, environment
and science and technology (OECD Guidelines).  Without attempting a description of
all these elements in detail, it is important to note that the Guidelines directly addressmany of the concerns voiced regarding the infringement of sovereignty and
development policies of the host country as well as environment or labour.WT/WGTI/W/30
Page 6
For example, the Guidelines:
• put a duty on MNEs to take into consideration and account the host countries aims
and priorities with regard to economic and social progress, the protection of the
environment and consumer interests;
• put a duty on MNEs not to attempt to influence local political activities;
• regarding environment, the Guidelines impose a duty on MNEs to consider the
environmental risks in decision-making, and take measures that minimise the risks of
accidents or damage to health and the environment.
A more detailed separate discussion on the philosophy and content of the Guidelines or other
similar instruments in the Working Group would appear  to be a useful exercise.  In any case, the
OECD Guidelines are scheduled to be reviewed la ter this year.  It would be useful for the OECD
Secretariat to update the Working Group on the progress of this review as it takes place.
3. Home countries' rights and obligations
Home countries' rights and obligations are not the main focus of investment rule-making, but
some are spelt out and are worth noting:
BITs
The main right of the home country in European BITs pertains to the possibility to invoke
State-to-State dispute settlement concerning the interpretation or application of the Agreement.  Thisis usually complemented by the home State's right to subrogation, i.e. the right to take over rights and
claims of its own investors which it has indemnifie d (e.g. through an investment insurance payment).
Regional and multilateral instruments
• The EC Treaty puts a specific obligation on the home countries to allow not only
capital inflows but also outflows (the same applies to the "Europe Agreements" withEastern European countries).
• The OECD Codes of Liberalization equally put an obligation on member States to
allow investment outflows.
• Lastly, obligations on the home country are also contained in the OECD Guidelines
for Multinational Enterprises (e.g. obligation to establish contact points andprocedural rights), as well as in the "ILO Tripartite Declaration of Principles"
concerning Multinational Enterprises and Social Policy.
4. Selected issues:  dispute settlement
Particular attention should be paid to the remedies and enforcement mechanisms contained in
the various investment instruments, as these provisio ns determine to a large extent the effectiveness of
the rights and obligations contained therein.WT/WGTI/W/30
Page 7
Investor-to-State
• The member States and their bilateral partners give their unconditional consent to
investor-to-State dispute settlement under their respective BITs (obviously for the
post-entry issues regulated therein, not for the admission of investment).
• ECT investor-to-State dispute settlement also has a post-entry coverage (as long as
the ECT does not have binding rules on the making of investments).
• The EC Treaty does not foresee an investor-to-State dispute settlement mechanism as
such, but of course the rights of investors (concerning both pre- and post-entry issues)
are protected by national courts and the European Court of Justice.
• Under the OECD or WTO instruments th ere is no investor-to-State dispute
settlement.
State-to-State
European BITs and the ECT provide State-to-State dispute settlement.  The OECD has a
somewhat weaker mechanism to settle disputes at the State-to-State level.  In the EC Treaty there is
no formal impediment to a foreign country bringing a case before the European Court of Justice, but
such cases are unlikely in reality, since the rights granted by the Treaty belong to the investors, and
not to their home State.
Comments
Leaving the special case of the EC Treaty apart, the Community and its member States have
not subscribed to investor-to-State dispute settleme nt on the admission of investment with regard to
third countries.  In contrast, the post-entry system of protection is far better developed.  Nevertheless,
it may be noted in this context that under the concisely and clearly drafted European BITs
investor-to-State dispute settlement is rarely invoked.
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