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Introduction

States actively seek to attract foreign investment into their economies because high levels of foreign investment have long been associated with increased economic growth and prosperity.Footnote 1 In the international legal sphere, the period since the North America Free Trade Agreement (NAFTA) entered into force has witnessed a literal explosion in the number of international investment agreements (IIAs),Footnote 2 in the form of both bilateral investment treaties (BITs) and preferential trade agreements (PTAs) involving all countries which were earlier part of the Soviet Union.Footnote 3 It was in the year 2000 that many Asian countries developed and reinforced their network of IIAs thereby making investment a key aspect of their economic pacts with third countries.Footnote 4

To put matters into the global context, the United Nations estimates that in 2014 the global inflows of foreign direct investment (FDI) amounted to 1.35 trillion USD ($1,350,000,000,000).Footnote 5 That figure represents capital moving from investors based in one State into investments located in another. The European Union (EU) is by far the leading foreign investment power. At the end of 2014, the EU outward stock of FDI in Asia represented EUR574.9 billion, which is equivalent to 14 % of all EU outward stock of FDI and is the amount of FDI affected by the change in FDI competence.Footnote 6

In parallel with the economic significance of foreign investment, the EU is emerging as an international actor in the regulation of foreign investment. The Treaty of Lisbon extended the Common Commercial Policy to FDI in 2009.Footnote 7 Albeit subject to unanimity, the EU competence, which will soon be implemented (and affect all third countries), is broad and exclusive,Footnote 8 thereby enabling it to conceive what could be the main features of a new model of European investment agreement. The shift from national to supranational level is, in itself, a major legal development. The EU is likely to employ its significant bargaining power when negotiating IIAs to improve, for instance, the standards of investment protection or to develop new forms of all-encompassing agreements.Footnote 9 In this regard, current EU investment negotiations with Asian countries are not only relevant for immediate participants but also for third countries.

As mentioned in the introduction, a major trend of international investment rule-making is the increasing regionalisation of negotiations. If the core of international investment regulations remains based on BITs and bilateral PTAs, it is important to underscore the current negotiations of broader pacts which involve more than two countries and cover a great number of economic areas. For instance, the EU intends to develop broad and encompassing trade and investment agreements which will include areas outside its exclusive competence, such as cultural cooperationFootnote 10 or criminal procedures in relation to intellectual property rights (IPR) violations.Footnote 11 A good illustration is the 2010 Preferential Trade Agreement (PTA) between the EU and South Korea; this is the first of the new generation of PTAs launched in 2007 as part of the “Global Europe” initiative. This PTA includes a dedicated protocol on cultural cooperation which sets up a framework for engaging in policy dialogue on culture and audiovisual issues.Footnote 12 By this, even if the CJEU would adopt a very broad interpretation of the new investment competence in the future, the negotiated trade and investment treaties are most likely to be mixed treaties. In addition to that, even if future EU agreements address only investment protection (i.e., no trade), they will largely be negotiated and signed as mixed agreements for two main reasons: (1) portfolio investment uses various indirect financial mechanisms and falls outside the Article 207 TFEU competence on FDI; and (2) because of Article 345 TFEU which states that the treaties shall in no way prejudice the rules governing Member States’ systems of property ownership, some aspects of expropriation will remain within MS competence. For Asian countries, an even more immediate issue is the negotiations of the TPP.Footnote 13

The present study of the evolving international regime for investment in Asia comes at a crucial time for the EU. The Asian regime for investment is not static but on the contrary very dynamic. It continues to grow and change, and it will be affected by various factors in the coming months and years which relate to the rise of some new actors such as the EU, the regionalisation of investment rule-making (illustrated by the Transpacific partnership) and the likely increase of litigation in Asia. The analysis first provides a macro-analysis of Asian rule-making. This section helps to understand the key characteristics of the Asian IIAs (second section). Once the relevant IIAs are identified, the paper will explore the details of these specific Asian IIAs. It will also provide a detailed micro-view of the Asian rule-making in investment (third section). That fundamental analysis will be complemented by a study of the mechanisms that organise the interplay of bilateral Asian IIAs with the rest of the world through regionalisation and the application of the most-favored nation (MFN) treatment clause (fourth section). A holistic analysis of the Asian regime for investment will not be complete without a thorough analysis of international investment litigation involving Asian parties (fifth section). Finally, policy lessons are drawn by way of conclusion in the final section.

The Asian Map of the European Investment Policy

Trade and investment dynamics might be boosted further by the recent reforms in the EU. The Treaty of Lisbon came into force on 1 December 2009, amending the former European Union (EU) and European Community (EC) treaties.

Among key improvements, the Treaty of Lisbon abolished the European Community (EC) and replaced it with the EU, endowing the latter with full legal personality.Footnote 14 The new EU has the ambition to be a more prominent global actor, with the creation of a new European external relations service with EU delegations around the world, and the EU’s High Representative, which is assigned greater importance. The Treaty of Lisbon extends the scope of external trade policy to issues of investment.

For the EU itself and its trading partners, the extension of “trade” policy to include investment is an important development and it will impact the international investment regime. The most important change to benefit EU investors might be the shift from post-establishment to pre- and post-establishment rights granted to foreign investors, which represent the two main approaches to the admission of foreign investment that can be recognised in the BITs.Footnote 15 “Entry” provisions erode the host State’s control over the admission of foreign investment into its territory.Footnote 16 They may affect the capacity of the host state to prioritise certain investments over others, and undermine its negotiating power vis-à-vis incoming investors, which in turn is crucial for negotiating terms and conditions that maximise the investment’s contribution to sustainable development.

The Evolving Asian Regime for Investment

Understanding the Asian rule-making in international investment requires knowledge of what are the international treaties (in the form of bilateral investment treaties or preferential trade agreements with investment chapters) that involve at least one Asian country. If at least one Asian country has signed such an investment pact, the host economy is likely to be affected by foreign investment, and, in any case its domestic investment policy is subject to the international obligations which are expressed in the investment agreement.

A first methodological challenge lies in the fact that there is no international organisation informed by Asian States of their international treaties. Also, not all Asian governments publish the results of their negotiations. Consequently, one of the contributions of the current paper is to provide a mapping of these Asian practices based on a survey on the main IIAs databases complemented by each national government’s source of information.

In substance, Asian investment treaty practice (as with all other national treaty practices in this regard) shows that virtually all treaties listed above which regulate foreign investment matters cover the following nine topicsFootnote 17: (1) definitions and scope of application; (2) investment promotion and conditions for the entry of foreign investments and investors; (3) general standards for the treatment of foreign investors and investments; (4) issues of monetary transfers; (5) expropriation (direct or indirect); (6) operational and other conditions; (7) losses from armed conflict or internal disorder; (8) treaty exceptions, modifications, and terminations; and (9) dispute settlement. These diverse provisions are important to reassure foreign investors that they will be able to reap the benefits of their investment, and no trend denies such an approach, although evidence on the extent to which investment decisions are influenced by investment treaties is mixed.Footnote 18 The following sections detail each of these provisions in light of Asian IIAs.

The current section looks at the investment agreements concluded by the 48 Asian Development Bank (ADB) members. In total, ADB countries have concluded 1,194 BITS and 61 PTAs with an investment chapter since 1959. As approximately 2,850 BITs have been concluded worldwide over the same period, it means that Asian countries have taken part in no less than 40 % of international rule-making.

To ease the analysis of the huge number of treaties, one can distinguish four main groups of Asian countries which reflects their respective role and importance in Asia investment rule-making.

Firstly, there is a group of 13 ADB countries which has not concluded a single investment agreement as of April 2013. This means that Bhutan, Cook Islands, Fiji, Kiribati, Maldives, Marshall Islands, the Federated States of Micronesia, Nauru, Palau, Samoa, Solomon Islands, Timor-Leste, and Tuvalu have so far been reluctant to engage in international investment rule-making.

Secondly, a group of eight ADB countries has signed some IIAs, but in a rather limited number. Indeed, Tonga, Vanuatu, Afghanistan, Myanmar, Nepal, Papua New Guinea, Brunei Darusalam, and New Zealand have each signed less than ten IIAs (see Fig. 1).

Fig. 1
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Asian countries with less than 10 IIAs. Sources: Compiled by the author on the basis of United Nations Conference on Trade and Development (UNCTAD) Database of Investment Agreements, WTO regional trade agreements database and national Ministries of Foreign Affairs public information

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Thirdly, an intermediate group of 14 ADB members has signed between ten and 40 IIAs. This group of relatively active States is made up of Hong Kong, China, Cambodia, Lao PDR, Turkmenistan, Taipei, China, Japan, Australia, Kyrgyz Republic, Sri Lanka, Bangladesh, Georgia, Tajikistan, Armenia, and the Philippines (see Fig. 2).

Fig. 2
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Asian countries with less than 40 but more than 10 IIAs. Sources: Compiled by the author on the basis of United Nations Conference on Trade and Development (UNCTAD) Database of Investment Agreements, WTO regional trade agreements database and national Ministries of Foreign Affairs public information

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Fourthly and finally, a group of ADB countries comprises the frontrunners which are the States that have concluded more than 40 IIAs (see Fig. 3). This group is made of Thailand, Kazakhstan, Mongolia, Azerbaijan, Pakistan, Uzbekistan, Singapore, Vietnam, Indonesia, Malaysia, India, Korea, and China.Footnote 19 It is on this group of countries that most of our micro-analysis will be based. Logically, the great number of IIAs which they have concluded reflects a very active investment diplomacy and this also means that there are bound to be a great number of third countries that have granted rights to a great number of foreign investors.

Fig. 3
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Asian countries with more than 40 IIAs. Sources: Compiled by the author on the basis of United Nations Conference on Trade and Development (UNCTAD) Database of Investment Agreements, WTO regional trade agreements database and national Ministries of Foreign Affairs public information

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The Asian Economies Singled Out by the EU

As part of the triad with North America and East Asia in investment matters,Footnote 20 Europe is one of the most relevant sources and destinations for investment. Yet the EU is itself just emerging as a player in investment matters. The EU Member States have shown a great keenness to retain national control over foreign investment rather than see the same moves into EU competence.Footnote 21

One of the consequences of this is that investment was covered by a plethora of BITs between individual EU Member States and third parties.Footnote 22 BITs were considered to be the single most important tool in investment relations between countries.

By proposing in 2006 a “Minimum Platform on Investment” (MPoI) the Commission sent a signal that it wants to acquire all the competences needed to negotiate investment deals.Footnote 23 This “MPoI” intended to serve—rather like national Model BITs—as a standardised negotiation proposal for ongoing and future PTA negotiations with third countries.

But the Treaty of Lisbon extends the Common Commercial Policy to the second most important field of international economic relations, namely, foreign direct investment (Articles 206 and 207 TFEU).

As of April 2015, there are eight Asian partners with which the EU was negotiating new trade agreements that will reflect the recent changes in EU FDI competence, namely, India, China, Japan, ASEAN as block but also bilateral discussions with Malaysia, Vietnam, Thailand, and Singapore (see Table 1). Almost all these countries are also involved in other investment negotiations: Malaysia, Singapore, Vietnam and Japan are part of the TPP, while China is leading the Regional Comprehensive Economic Partnership (RCEP) project.

Table 1 Current EU negotiations with Asian economies since 2009 to now
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The Endogenous Determinants of the Next Investment Treaties

This section looks at the investment agreements concluded by the 48 ADB developing member economies.Footnote 24 To ease the analysis of the huge number of treaties, four main groups of Asian countries are distinguished to reflect their respective role and importance in Asian investment rule-making. This section identifies the Asian Noodle Bowl of IIA which represents the existing negotiated preferential treatment for investors that the EU will try to neutralise through current negotiations. It then identifies the various roles played by Asian countries and, in particular, by the eight partners already singled out by the EU. Thirdly, the section looks at the quality of some existing Asian IIAs.

Identifying the Asian Noodle Bowl of Investment Treaties

To refine the contribution of ADB countries to international investment rule-making, it is necessary to narrow the analysis to these IIAs which have been concluded between Asian countries only. Indeed, many of the agreements presented above may have been concluded with leading capital exporting countries such as the USA or other Western countries, and this implies that the treaty might rather reflect the interest and bargaining power of the capital exporting countries. Narrowing the analysis to pure Asian IIAs also helps to identify the ADB countries that play a leading role in the development of investment rules in Asia.

The table in Annex represents a wealth of information in Asia’s investment treaty practice. In total, 208 IIAs have been concluded between two or more countries which are Asian. This great number of IIAs forms what is the core of the Asian noodle bowl of investment treaties. Out of the 202 IIAs, there are 146 BITs which are currently in force whereas 41 BITs have been signed but have not yet entered into force. To these 187 BITs, one must add 21 PTAs with investment chapters all of which have entered into force.

One can also discern some patterns for each country. For instance, Singapore is a major user of PTAs to regulate investment as it already has seven such instruments. Then come New Zealand and Japan with six PTAs covering investment issues. A majority of Asian countries have so far been reluctant to incorporate investment negotiations in their trade agreements. One can also observe that some countries have had difficulties in ratifying a BIT which was signed earlier. This is the case of Cambodia, Tajikistan, Vietnam and Malaysia, which have six BITs. On the top of this list is Pakistan which has signed eight BITs which are yet to enter into force.

Basically, one key idea is that China has BITs or PTAs with almost all ADB countries except Nepal, and this makes China the Asian leader in investment rule-making. China (30 Asian IIAs) but also India (23 Asian IIAs), Korea (22 Asian IIAs), Vietnam (21 Asian IIAs), Indonesia (20 Asian IIAs) and Malaysia (19 Asian IIAs) are the ADB countries with the greatest number of IIAs in force which are also diverse in their forms (either BITs or PTAs). These are the big players which will be at the core of the substantive analysis in Section 3. These frontrunners’ treaty practice is not only important in quantitative and qualitative terms, but it is also crucial in the light of one key IIAs provision, namely, the most-favoured nation treatment. This particular provision plays a role which increases in significance when a country is bound by a great number of investment treaties. The case of China is, in this light, very important as the MFN provision found in China’s IIAs may, to some extent, represent an embryo of Asian multilateral agreements on investment.

The Annex which provides an exhaustive view of all IIAs concluded between Asian countries also helps to understand an important feature of Asian investment rule-making which is the rise of PTA to regulate investment matters. In total, 21 Asian PTAs with investment chapters have been concluded since 2001 (see Fig. 4).Footnote 25

Fig. 4
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The rise of Asian PTAs with investment chapters. Sources: Compiled by the author on the basis of United Nations Conference on Trade and Development (UNCTAD) Database of Investment Agreements, WTO regional trade agreements database and national Ministries of Foreign Affairs public information

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Quantitative Ranking

Firstly, there is a group of 13 ADB economies which had not concluded a single investment agreement as of April 2013. Bhutan, Cook Islands, Fiji, Kiribati, Maldives, Marshall Islands, the Federated States of Micronesia, Nauru, Palau, Samoa, Solomon Islands, Timor-Leste, and Tuvalu have so far been reluctant to engage in international investment rule-making. Secondly, a group of eight ADB economies has signed a limited number of IIAs. Indeed, Tonga, Vanuatu, Afghanistan, Myanmar, Nepal, Papua New Guinea, Brunei Darussalam, and New Zealand have each signed less than ten IIAs (see Table 2). Thirdly, a group of 14 ADB member economies has signed between ten 0 and 40 IIAs. This group comprises Hong Kong, China; Cambodia; Lao People’s Democratic Republic (Lao PDR); Turkmenistan; Taipei, China; Japan; Australia; Kyrgyz Republic; Sri Lanka; Bangladesh; Georgia; Tajikistan; Armenia; and the Philippines.

Table 2 IIAs signed by ADB member economies
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Finally, there is a group comprising the frontrunners, which are the economies that have concluded more than 40 IIAs: Thailand, Kazakhstan, Mongolia, Azerbaijan, Pakistan, Uzbekistan, Singapore, Vietnam, Indonesia, Malaysia, India, the Republic of Korea, and, at the forefront, the People’s Republic of China (PRC).Footnote 26 It is within this last group that most of our micro-analysis will be based. Logically, the great number of IIAs they have concluded reflects a very active investment diplomacy, which also means that there are bound to be a great number of third countries and have granted rights to a great number of foreign investors. In this light, the EU has decided to negotiate investment with Asian partners who are already well experienced as China, India, Malaysia, Vietnam, Singapore and Thailand are all in the Asian tier 1. Only Japan, among the Asian partners negotiating with the EU, counts less than 40 IIAs.

If we limit our analysis to intraregional IIAs, some interesting observations can be made. One is that the PRC is the Asian leader in investment rule-making because it has BITs or FTAs with almost all ADB developing member economies except Nepal. The PRC (30 Asian IIAs), India (23 Asian IIAs), the Republic of Korea (22 Asian IIAs), Vietnam (21 Asian IIAs), Indonesia (20 Asian IIAs), and Malaysia (19 Asian IIAs) have the greatest number of IIAs in force, which are also diverse in their forms. These are the big players that will be at the core of the substantive analysis in this section.

These frontrunners’ treaty practice is not only important in quantitative and qualitative terms, but is also crucial in the light of one of the key IIAs provisions, which is MFN treatment. This provision plays a significant role when a country is bound by a great number of investment treaties. The case of the PRC is very important because the MFN provision found in the PRC’s IIAs may, to some extent, represent an embryonic Asian multilateral agreement on investment.

One can also discern some patterns for each country in the distinction between BITs and FTAs. For instance, Singapore is a major user of FTAs to regulate investment because it already has seven such instruments. Then come New Zealand and Japan with six FTAs covering investment issues.Footnote 27 A majority of Asian countries have so far been reluctant to incorporate investment negotiations into their trade agreements. Virtually, all the FTAs concluded by India and the PRC ignore investment matters.

One can also observe that some countries have had difficulties in ratifying a BIT earlier signed. This is the case of Cambodia, Tajikistan, Vietnam, and Malaysia, each with six BITs that have not yet come into force. On the top of this list is Pakistan, which has signed eight BITs that are yet to enter into force.

Qualitative Ranking

All IIAs enshrine a series of obligations on the parties to ensure a stable and favorable business environment for foreign investors. These obligations pertain to the treatment that foreign investors are to be afforded in the host country by the domestic authorities.

Meanwhile, such “treatment” that encompasses many laws, regulations, and practices from public entities also significantly affect foreign investors or their investments. Thus, analysis of the quality of investment treaties is important to provide a clearer view of their likely impacts.Footnote 28 Not all investment treaties are drafted similarly as many of their provisions may vary significantly in scope of application and likely economic impact.Footnote 29

The Bilateral Investment Treaties Selection Index (BITSel Index)Footnote 30 provides extremely detailed support to understand national treaty practices. In light of the great number of BITs in which different provisions and their different wordings would give birth to a broad kaleidoscope of legal obligations and, hence, regulatory effects, the BITSel Index, which is based on the 11 most important elements found in most existing BITs.Footnote 31 The BITSel Index has a scale from 1.0 (restrictive) to 2.0 (liberal). The data for the top five Asian frontrunners—Indonesia, Malaysia, India, the Republic of Korea, and the PRC—have been extracted to shed light on the substance and quality of these respective treaties (see Table 3).

Table 3 Sampling Asian treaties quality (BITSel quality indicator)
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The results are stunning because the strongest average quality indicator belongs to India (1.82), which is far more significant than those of countries with relatively weaker investment treaties such as Indonesia (1.57) and the PRC (1.58). Less surprisingly, the Republic of Korea ranks second (1.75) while Malaysia is third (1.62).

These average values are based on a relatively high number of treaties and confirm the significant gap between the top five in rule-making: not all Asian investment treaties are similar. India is inclined to grant quite significant rights to foreign investors, although it has signed fewer treaties than the PRC. Conversely, the PRC has signed more treaties, but their average quality is among the lowest of the top five.

Of course, these averages also depend on the partner countries. Treaties are, by definition, the result of negotiations and they reflect the consensus that the two sides reached after exchanging their goals and visions. In view of this, we can take a closer look at the BITsel and see what treaties for each country in the top five stands at the extreme (most robust or weakest protection) of the national practice.

In the case of the PRC, the treaty with the greatest quality was concluded with Germany (1.90). This confirms the fact that the PRC truly entered a new generation of investment treaties, with greater rights and access to investor–State dispute settlement (ISDS), only after 2005, and thus the treaty with Germany represents a milestone. At the other extreme, the PRC concluded a series of relatively weak treaties with Bulgaria, Mexico, Colombia, and Costa Rica. One can further fine-tune the analysis and note that there is a significant difference between the IIAs concluded before and after 2005. In the wake of the PRC–Germany BIT, the PRC further negotiated treaties which were rather more favourable to foreign investors. This generation provides broader and more substantive obligations with regard to the treatment of foreign investment. Post-establishment national treatment—albeit with sectoral reservations in some cases—and no substantial restrictions on the ability of foreign investors to challenge host country measures in international arbitration are standard in this category. The PRC’s “new generation” of BITs concluded since the beginning of this century seems to belong in this company. Consequently, these post-2005 IIAs obtain a score of 1.65, while prior to 2005 the score is only 1.55.

In the case of the Republic of Korea, the treaty with Vietnam is one of the strongest (1.90). At the other extreme, there is the agreement between the Republic of Korea and Indonesia (1.36). India concluded more than a dozen treaties of a rather high quality, for example with Switzerland and Mauritius, giving it a score of 1.90. On the other hand, a relatively weak treaty was concluded between India and Mexico (1.63). Indonesia ranks fourth among Asian countries in the number of investment treaties. However, it has a rather low average quality. In this light, it is interesting to note that the Germany–Indonesia treaty provides a very high level of protection (1.90), much higher than the Indonesian average. However, on the other hand, the Indonesia–Denmark treaty offers an example of a rather weak treaty (1.27). Last but not least, Malaysia, whose economic policy is deeply intertwined with politics, has concluded a rather strong treaty with Saudi Arabia (1.81). However, the treaty between Malaysia and Lebanon scores poorly (1.36).

The next step is to calculate the coefficient of variation, which is a better measure of heterogeneity. The number itself expresses the relation of the standard deviation (a measure for the dispersion of the data) to their mean. If the coefficient of variation is lower than 0.5, the mean value is a good representation for all data. For Malaysia, it is 0.29. What does it tell us? Returning to our example, the 0.29 average for Malaysia means that the variation in the provisions is 29 %.

Because all the coefficients of variation are well below 0.5 for each BIT, the mean is a good representation for all the single BIT provisions. What does the coefficient of variation say in comparison to other countries? The one for the PRC is 0.31, so the heterogeneity of BITs is slightly larger for Chinese BITs than for Malaysian BITs. While the mean value of each country tells us how investor-friendly its BIT provisions are, the coefficient of variation tells us how heterogeneous they are. The key advantage of the coefficient of variation is that it is directly comparable across countries. If we have a coefficient of variation of country A at 30 % and country B at 60 %, we can say that the heterogeneity of country B is twice as large as that of country A.

At this stage, it is important to mention two lessons. Firstly, there is a significant discrepancy between Asian treaty practices and also between individual treaty practices for a particular country. Secondly, although this paper focuses on the broad analysis of Asian investment treaties, it also underlines the need to look more carefully at the key provisions found in each investment treaty, and this will be addressed in a second paper.

The Exogenous Parameters of the Current Negotiations

The current negotiations on investment between the EU and Asian countries will also be affected by some exogenous parameters. As the future treaties will be subject to existing MFN provisions the meaning and implications of this legal provision must be reviewed. Secondly, the broader context of Asian investment integration through huge treaty negotiations (such as the TPP, RCEP and Triangular treaty) will be discussed. These ambitious pacts oblige the EU to negotiate at least comparable standards to maintain the competitive advantage of EU investors.

The Most-Favoured Nation Treatment Principles in Motion

The principle of national treatment prohibits discrimination on the grounds of nationalityFootnote 32 and, more generally, any discrimination between investors and investments produced domestically and those from other countries.Footnote 33 Together with the most-favoured nation (MFN) obligation, it forms the fundamental principle of non-discrimination in investment law.Footnote 34

In regard to investments, the principle of the MFN treatment seeks to establish equal conditions of competition for all foreign investors, independently of their country of origin.Footnote 35 This principle allows investors covered by one IIA to claim equal benefits to those granted to investors from other countries, irrespective of whether those benefits are established in other IIAs, or in the actual regulatory practice of the host country.

While traditionally regarded as a standard clause without major implications, the MFN principle has, to say the least, recently gained attention in the ambit of international investment rule-making in the light of the application of this provision recently made by some arbitral panels.Footnote 36 The Impregilo v. Argentina tribunal majority diplomatically noted that the issues remain controversial and that the “predominating jurisprudence which has developed is in no way universally accepted.”Footnote 37

Article 12.5 of the June 2012 leaked draft of the Trans-Pacific Partnership (TPP) investment chapter defined the MFN as follows:

1. Each Party shall accord to investors of another Party treatment no less favourable than that it accords, in like circumstances, to investors of any other Party or of any non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory.

2. Each Party shall accord to covered investments treatment no less favourable than that it accords, in like circumstances, to investments in its territory of investors of any other Party or of any non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory.

3. For greater certainty, the treatment referred to in this Article does not encompass international dispute resolution procedures or mechanisms such as those included in Section B.

The scope of the most Asian IIAs MFN obligation, like any other substantial provision of the treaty, is limited not only by the overall coverage of the IIA, but also by the wording introduced in an IIA clause itself. Several aspects are relevant in this regard, as follows. Usually, whether the obligation applies to investments already established in the country, or whether it also applies to the ability of the investor to claim access to the host country (so-called pre-establishment rights). TPP MFN expressly extends the coverage of the MFN obligation to pre-establishment rights.Footnote 38 Usually, the language which allows the comparison between the treatment of investors from different countries may add specific conditions. The TPP MFN refers to the “in like circumstances” which is a typical wording of US treaties and very well known in NAFTA case law.Footnote 39 Finally, whether issues pertaining to investor–State dispute settlement procedures are covered by the MFN principle.Footnote 40 The TPP MFN clearly excludes in its third paragraph the ISDS clause.

Consequently, the scope of the TPP MFN commitment is rather broad in order not to dilute advances made in negotiations partners would conduct with third countries.Footnote 41 One can imagine that TPP may apply to several third-party treaties with the possibility that the claimant may import substantive rights. For instance, the Tribunal MTD v. Chile applied an MFN provision to accord an investment the fair and equitable treatment protections of other BITs.Footnote 42 The Impregilo v. Argentina Award recorded the claimant’s contention that the requirement of “full protection and security” in the Argentina–USA BIT was applicable through the MFN clause in the Argentina–Italy BIT.Footnote 43 Also, the White v. India Final Award holds that the BIT’s MFN clause, a substantive provision, reaches an “effective means of asserting claims” provision contained in another of the respondent’s BITs.Footnote 44 Finally, the EDF v. Argentina Award found that the applicable treaty’s MFN clause permits recourse to the “umbrella clauses” of third-country treaties.Footnote 45

This should not be surprising. The principle of most-favoured-nation treatment in the TPP is of paramount importance to the international investment regime. Non-existent in customary international law,Footnote 46 it constitutes the very foundation of treaty-based international investment regulation. With the national treatment, MFN is constitutive of the system of complex multi-layered governance for investment. Equally important in future litigation, the more IIAs that a country has, the more MFN might play an important future role. Malaysia, Chile and Vietnam are in this regard, the TPP countries that should pay great attention to the TPP MFN as these three have already granted rights to a great number of their party investors and investments.

The increase of Asian FTAs with investment chapters also raises an important issue of connections with existing IIAs. Indeed, the MFN treatment provisions in existing treaties may give rise to the so-called free-rider issue that arises when benefits from customs unions, FTAs, or economic integration organisation agreements are extended to non-members. To avoid this outcome, many IIAs exclude the benefits received by a Contracting State Party to a regional economic integration organisation (REIO) from the scope of MFN treatment obligations through a REIO exception. Virtually all IIAs include a carve-out from the MFN principle (see Table 4).

Table 4 Non-applicability of the MFN principle to FTAs
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A considerable number of existing IIAs cover, at least, specific types of regional integration that are expressly mentioned in the agreement. But some countries extend the scope of the REIO exception to similar arrangements. For instance, the India model agreementFootnote 47 refers to “any existing or future customs unions or similar international agreement to which it is or may become a party” (Article 4). The French model agreement refers to a “free trade zone, customs union, common market, or any other form of regional economic organization” (Article 4). Such provisions allow France or India to enter into new FTAs with investment chapters without the obligation to extend the benefits to countries with which they were bound through a BIT. In this regard, one might also assume that some countries may be tempted to negotiate investment agreements in the context of an FTA to isolate the newly negotiated treaty from other BITs. Pakistan, for instance, seems to favour negotiations of investment within FTAs in order not to be subject to full MFN applicability under other BITs.

In this light, the 2012 ASEAN Comprehensive Investment Agreement (ACIA) MFN exception is, logically, more limited. ACIA Article 6 applies only to “any sub-regional arrangements between and among Member States; or (b) any existing agreement notified by Member States to the AIA Council pursuant to Article 8(3) of the AIA Agreement.” The effect of such a provision is to maintain the applicability of the basic MFN for the benefits of the members. Of course, in the context of a regional integration scheme, such as ACIA, members have an interest to be granted better treatment than one of them would grant of a third country through an IIA in the form of an FTA or a BIT.

The Current Asian Negotiations on Investment: RCEP, Trilateral and TPP

The rise of plurilateral agreements with wider scope is likely to produce greater economic effects while certainly spreading the basic principles of foreign investment protection to most Asian economies. While the rise of plurilateral IIAs may alleviate the problems associated with the noodle bowl of IIAs, it may also intensify the problems by creating more common-member agreements.

In this connection, three determinants are assessed to play a major role in Asian rule-making. Firstly, there are three Asian plurilateral agreements, either recently concluded or currently under negotiations, that deal with investment matters and illustrate the regionalisation of investment law: ACIA; Regional Comprehensive Economic Partnership; and the PRC–Japan–Republic of Korea Trilateral Investment Treaty. Secondly, the current TPP negotiations may soon result in one of the most ambitious investment treaties ever negotiated, which may have the potential to absorb all Asian investment treaties. Thirdly, an exogenous parameter is the EU decision to expand into investment negotiations and replace the negotiating role of EU Members States. Virtually all Asian countries already bound with many of the 28 EU Member States are going to be affected.

There has long been a debate between the PRC and Japan on the “appropriate” membership of Asian economic cooperation bodies. The PRC prefers the ASEAN+3 framework (EAFTA), while Japan insists upon the inclusion of Australia, New Zealand, and India (CEPEA). To avoid being involved in the political rivalry between the two powers, in 2011 ASEAN proposed RCEP, under which the modality of economic interaction in East Asia could be discussed by going beyond membership problems. All partners that have FTAs or EPAs with ASEAN members—which include the PRC, Japan, and the Republic of Korea, as well as Australia, New Zealand, and India—are involved in RCEP.

Officially, the RCEP will aim at creating a liberal, facilitative, and competitive investment environment in the region. Negotiations will cover the four pillars of promotion, protection, facilitation, and liberalisation. In this connection, the RCEP Working Groups in Goods, Services, and Investment were established by the ASEAN Leaders during the 19th ASEAN Summit to consider the scope of the RCEP and the ASEAN Economic Ministers have accepted their recommendations as detailed in the Guiding Principles and Objectives for Negotiating the Regional Comprehensive Economic Partnership (RCEP). However, no progress had been made as of July 2013.

The ASEAN–PRC FTA came into force in 2005, while its investment chapter became effective in 2010. However, this is not an ambitious agreement, covering only the protection of investment. Meanwhile Japan’s EPAs with individual ASEAN members include relatively sophisticated investment chapters that cover both the protection and liberalisation of investment. However, the Japan–ASEAN EPA was signed in 2008, but its investment chapter is still under negotiation. If Japan–ASEAN EPA’s investment chapter simply consolidates Japan’s EPA with individual ASEAN countries, it would become a relatively comprehensive one. However, there is a possibility that ASEAN as a bloc will exercise its bargaining power to lower the level of ambition. In any event, the modality of the future investment chapter for the Japan–ASEAN EPA would be likely to affect the investment chapter of RCEP.

Another important development that seems to have important implications for the investment chapter of RCEP is the PRC—Japan–Republic of Korea trilateral investment treaty recently signed after 9 years of negotiations. The trilateral investment treaty is not especially ambitious because it covers the protection of investment only (liberalisation is not covered) and its list of prohibited performance requirement measures is limited. The dominant argument in Japan is that if the trilateral FTA between the PRC, Japan, and the Republic of Korea is to be pursued, its investment chapters should be more ambitious.

Thus, it is difficult to foresee at this stage the modality of the investment chapter of RCEP, mainly because of the disagreement between Japan and the PRC with regard to the level of ambition. Perhaps, from the Chinese perspective, the trilateral investment treaty is a done deal, upon which the investment chapter of a trilateral FTA should be based. From the Japanese perspective, however, upgrading the investment discipline is a necessary component of the trilateral FTA.

The TPP is a twenty-first century FTA designed to change FTAs and the problems associated with them by making them more useful in spreading liberalisation globally by “multilateralizing regionalism.”Footnote 48 The TPP’s potential for successfully achieving such a goal is partly because of the nature of the partners, given their diversity and geographical spread linking both sides of the Pacific,Footnote 49 and partly because of the intended nature of the deal in achieving an all-new type of FTA design. In the view of leading authors, the definition of a “high-quality, twenty-first century” FTA means that such an agreement should combine three key features.Footnote 50 Firstly, a “high-quality, twenty-first century” agreement should have a comprehensive scope. Secondly, it should have a substantial depth that includes cooperation and integration components between members. Thirdly, it must contain a set of shared values, ideology, or norms between participants.Footnote 51

The TPP is important for the future of trade and investment regulation because it may represent the first concrete effort to sort out some of the negative effects (i.e., stumbling blocks) created by overlapping FTAs. Therefore, the evolution of the TPP could either strengthen or fracture current trading regimes. The specific architecture of the agreement,Footnote 52 including the elements of various negotiating chapters, is critical to realising high-quality outcomes. In the short period of negotiations under review (March 2010–July 2013), three key features of TPP regulation on foreign investment have emerged. Firstly, the dynamic characters of the negotiations have progressed quite regularly while incorporating new countries. Secondly, the level of US leadership is obvious in both the form and substance of the TPP. While exerting this leadership in a group of 11 countries, half of which are emerging economies, the USA also has isolated the largest emerging economies: the PRC, India, and Brazil. Thirdly, in the light of the previous points, the TPP represents a major FTA that illustrates the regionalisation of investment rule-making and probably represents a benchmark for state-of-the-art international law for foreign investment.

If the TPP reflects US investment rule-making practice, the EU seems to be willing to negotiate new investment treaties largely inspired by this US practice. To these current developments, one should add the start of the Trans-Atlantic Trade and Investment Partnership (TATP) announced by President Obama in his 2012 State of the Union address. These new negotiations may well confirm the global adoption of a NAFTA-like mode of investment regulation. The current paper focuses on Asian rule-making in international investment but it will also point at the relevant time to possible interaction with developments elsewhere in the world that may affect various Asian economies.

In fact, the June 2012 leaked draft of the TPP investment chapter, which was largely unchanged as of April 2013, resembled in large measure the more recent USA IIAs rather than the 1995 text of NAFTA Chapter 11. In a nutshell, the TPP investment chapter does not provide major innovations in treaty drafting. However, the TPP crystallises the innovations since 2001 concerning NAFTA interpreting notes and NAFTA case law. The normative quality of the TPP, however, places the agreement among the most detailed and important investment treaties. In this light, it is possible to return to the question raised in the Introduction of whether the TPP will strengthen or fracture current regimes.

As these investment treaties were negotiated in the context of an agreement of great economic significance, including a broad MFN provision, if the TPP negotiations proceed successfully, then, as a broad FTA, the TPP will presumably supersede NAFTA and other existing IIAs where there is overlap. Interestingly, the TPP may be read as a strengthening, or a de facto renegotiation, of NAFTA and many other agreements such as the ASEAN–Australia–New Zealand FTA (2010). The TPP is even more clearly a strengthening of investment disciplines for some developing countries such as Vietnam and Malaysia, which have not previously been bound to the USA.

Last but not least, TPP membership is open to new members willing to sign up to its commitments under the sole condition that it is accepted by the current TPP members. The absence of geographic or economic conditions gives the TPP a significant attractiveness. Japan made an official announcement in joining TPP negotiations on 15 March, 2013. And the list of prospective members is long, including the Republic of Korea; Thailand; Taipei, ChinaFootnote 53; the Philippines; Lao PDR; Colombia; and Costa Rica. Should all of these countries join the TPP and ratify, among other provisions, the investment chapter, this would no doubt signify an embryonic version of a long-awaited multilateral agreement on investment.

Conclusion

This paper provides a framework of analysis for understanding investment rule-making in Asia and challenges which lie ahead for the EU investment policy. Several important issues can be summarised.

Firstly, as in the rest of the world, the regulation of international investment is a field of law, which has experienced major developments in Asia, especially during the last decade. Against such a fast-evolving canvass, the EU negotiations will both benefit from sound practice in investment rule-making from partners but also encounter difficulties in adopting state-of-the-art provisions.

Secondly, there are currently 146 intraregional BITs in force, and there are 41 intraregional BITs that have been signed but have not yet entered into force. In addition, there are 21 intraregional FTAs in Asia that have investment chapters, which have all entered into force. Thus, in total, there are 187 intraregional IIAs in force (208 intraregional IIAs if “signed but not yet in effect” IIAs are included). This large number of IIAs forms the core of the Asian noodle bowl of investment treaties.

Thirdly, out of the 48 ADB developing member economies, 13 comprise a group of frontrunners that have concluded more than 40 IIAs. This group consists of Thailand, Kazakhstan, Mongolia, Azerbaijan, Pakistan, Uzbekistan, Singapore, Vietnam, Indonesia, Malaysia, India, the Republic of Korea, and the PRC. Last but not least, although investment rule-making has undergone profound changes in recent years (e.g., treatification, legalisation, and proliferation) it is very likely to continue to evolve just as quickly. In this regard, a major trend of international investment rule-making is the increasing regionalisation of negotiations, which will have an impact on Asian regulations. If the core of international investment regulations remains based on BITs and bilateral FTAs, it is important to underscore the importance of ongoing negotiations of broader pacts, which involve more than two countries and cover a number of economic areas. The rise of plurilateral agreements with a wider scope—such as ACIA, “ASEAN plus” agreements, RCEP, and TPP—is likely to produce greater economic effects while spreading the basic principles of foreign investment protection to most Asian economies. It also suggests that research and policy efforts should increasingly focus on these new instruments.

Fourthly, the paper also identified the TPP as one of the key investment agreements in Asia which is likely to oblige the EU to negotiate high-level standards for foreign investment—they should at least be of comparable standard with those of Asian countries. The TPP reflects a US investment rule-making practice while the EU seems to be willing to negotiate new investment treaties largely inspired by the US practice.Footnote 54 These new negotiations may well confirm the global adoption of a NAFTA-like mode of investment regulation which will provide a benchmark for all future EU negotiations with Asian countries.