Keywords

These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Europe’s contact with East Asia goes back further than any other region in the world. It could be traced to Marco Polo’s historic journey to China 800 years ago. […] East Asia and the EU share a common vision for the future. They want to build a peaceful and prosperous multipolar world. They accept globalization but also want to live in a world of cultural diversity. East Asia and Europe want economic growth, but they also value social equity, a healthy environment and a rich cultural life.—H.E. Ambassador Tommy T.B. Koh, Europe and East Asia Need to Get Acquainted, International Herald Tribune, 14 April 2000Footnote 1

Introduction

The European Union (EU) and the Association of Southeast Asian Nations (ASEAN) are two dynamic trade and investment blocs, each of which has been working toward regional integration. The long and rich EU integration process has been an interesting model and naturally, many, including ASEAN, study the EU system for lessons to be drawn.Footnote 2 Both regions aim for peace and economic development and consist of diverse economic and social memberships.

ASEAN was formed in 1967 by five founding States, Indonesia, Malaysia, the Philippines, Singapore, and Thailand, with a view to promoting regional peace and stability.Footnote 3 The economic integration impetus began about two decades afterward, beginning with plans for an ASEAN Free Trade Area to promote trade and investment liberalisation, including the elimination of tariff and non-tariff barriers to intra-ASEAN trade.Footnote 4 The formal treaty process to realise these objectives took place in 1992 with the introduction of a Common Effective Preferential Tariff (CEPT) system for the then members.Footnote 5 Plans for an ASEAN Investment Area were established in 1998.Footnote 6 In 2009, ASEAN members signed a landmark ASEAN Comprehensive Investment Agreement (ACIA).Footnote 7 In 2008, aiming to strengthen the legal architecture of the Association, ASEAN members adopted the ASEAN Charter, setting out the Association’s purpose, objectives, the legal framework of its institutions, and provisions for dispute settlement.Footnote 8

ASEAN integration has proceeded in developing three pillars, giving rise to the ASEAN Economic Community (AEC), ASEAN Socio-Cultural Community (ASCC) and the ASEAN Political-Security Community (APSC).Footnote 9 In recent years, ASEAN has accelerated economic integration to establish the ASEAN Economic Community (AEC) by 2015 pursuant to the ASEAN Economic Community Blueprint, to establish ASEAN as a single market and production base.Footnote 10

In tandem with these developments, members of ASEAN also engaged in bilateral and regional trade liberalisation and integration initiatives, by way of free trade agreements (FTAs) and bilateral investment agreements (BITs). Among ASEAN members, Singapore was an early participant in FTAs, with its first FTA being signed with New Zealand in 2000.Footnote 11 She has, over the past 15 years, pursued a “dual-track” approach to trade negotiations at the multilateral and bilateral/regional levels.Footnote 12

As the number of bilateral FTAs was growing, ASEAN members also began to engage in FTAs with external partners, namely Australia, New Zealand, China, India, Korea and Japan.Footnote 13 Presently, ASEAN is negotiating a Regional Comprehensive Economic Partnership (RCEP) agreement with these six partners.Footnote 14

EU-ASEAN Trade and Investment and Singapore’s Role

After the US and China, ASEAN as a whole is the EU’s third largest trade partner, with trade in goods and services exceeding €206 billion in 2011.Footnote 15 Conversely, after China, the EU is ASEAN’s second largest trade partner. In investment, the EU has invested an average of €9.1 billion in ASEAN over the period of 2000–2009.Footnote 16

Within ASEAN, Singapore, a trade and investment hub, is the largest trading partner of the EU in the ASEAN bloc, accounting for one-third of EU-ASEAN trade.Footnote 17 At the end of 2011, Europe and Asia were the top two sources of FDI in Singapore. Between the end of 2001 and the end of 2011, EU FDI in Singapore tripled from S$85b to S$252b.Footnote 18 Among EU members, the top FDI investors in Singapore were, between 2001 and 2011, the Netherlands and the United Kingdom.Footnote 19 On the other hand, Singapore invested 14 % of her outward FDI stock in Europe, with the major destinations being the United Kingdom, the Netherlands and Switzerland.Footnote 20

Given that the EU is the largest investor in ASEAN,Footnote 21 it has a natural interest in ensuring a conducive trade and investment environment and appropriate legal protection for its investors.

Efforts were initially made to negotiate a region-to-region EU-ASEAN FTA, with seven ASEAN members but these have not led to an agreement.Footnote 22 Consequently, the EU re-launched negotiations with individual ASEAN members.Footnote 23 The first of these members has been Singapore. As the EU Trade Commissioner, Karel de Gucht, said: “The launch of FTA negotiations with Singapore, for us, marks the beginning of a deeper engagement with Asia, and in particular our relations with the ASEAN region.”Footnote 24

The EU and Investment Negotiations, Post-Lisbon Treaty

Through the Lisbon Treaty, the EU now has exclusive competence regarding its Common Commercial Policy which includes FDI. Footnote 25 This means that the EU is able to negotiate investment agreements with third party states. This watershed development has unlocked new opportunities for engagement in trade and investment matters with ASEAN/Asian States. As described in the EU document, Towards a Comprehensive European International Investment Policy, investment is a “new frontier” for the EU’s Common Commercial Policy.Footnote 26

The EU’s Recent Negotiations in Asia: A Brief Overview

As the twentieth century came to a close, it was clear that the EU was becoming increasingly interested in developing stronger trade and investment relations with Asia. The European Commission’s September 2001 Communication, Europe and Asia, a Strategic Framework for Enhanced Partnerships, laid the foundation of renewed EU-Asian ties at the beginning of the twenty-first century.Footnote 27 This was followed not long after, by a more specific Communication, A New Partnership with Southeast Asia, issued in 2003.Footnote 28 This latter document spelt out six “strategic priorities” for such enhanced ties, including the injection of a “new dynamism” into regional trade and investment relations.Footnote 29 This included establishment of a “trade action plan” known as the Trans-Regional EU-ASEAN Trade Initiative (TREATI).

At about roughly the same time, by way of the broader context, the US and Singapore were negotiating a landmark FTA; the first by the US with an ASEAN member, as part of the Asian trade and investment agenda of then President George W. Bush.Footnote 30 By 2004, Singapore had signed the United States-Singapore FTA (USSFTA). No doubt, these developments were being watched with keen interest by EU policy makers.

In April 2007, the EU adopted a mandate for FTA negotiations with ASEAN. However, attempts to negotiate an FTA with ASEAN as a whole met with difficultiesFootnote 31 and the EU subsequently decided to adopt a more limited approach with individual countries of ASEAN.Footnote 32 In 2009, the Commission was therefore further authorised to negotiate FTAs with individual ASEAN members.Footnote 33 Plans for an EU-ASEAN FTA have been in abeyance but the EU’s position is that an EU-ASEAN FTA remains the ultimate goal.Footnote 34 With ASEAN members busy preparing for the AEC deadline of 2015, it was recently reported that ASEAN will resume negotiations with the EU after the establishment of the AEC.Footnote 35

In March 2010, negotiations for an EU-Singapore Free Trade Agreement (EUSFTA) were launched. The EU’s negotiating mandate was modified in 2011 to permit investment negotiations for the EUSFTA.Footnote 36 By December 2013, the EU had completed negotiations for this, its first-ever FTA with an ASEAN country. This is also its first FTA with an Asian State that will contain an investment chapter. Before this, the EU had completed negotiations with Canada and Korea.Footnote 37 It presently has ongoing negotiations with China,Footnote 38 India,Footnote 39 Japan,Footnote 40 Malaysia,Footnote 41 ThailandFootnote 42 and Vietnam.Footnote 43 Explaining part of the thinking behind these negotiations, the EU stated recently:

… the EU’s global competitors are currently negotiating preferences for their own companies, in the contexts of the Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership. The EU, by negotiating preferential market access of its own, can protect EU exporters against a loss of competitiveness in many Asian markets resulting from the FTAs concluded by others.Footnote 44

It is noteworthy too, that Singapore views the TPP and RCEP as possible pathways to a larger Asia-Pacific free trade area.Footnote 45

EU-Myanmar

Over the last two years, because of a number of domestic reforms in Myanmar, trade and investment relations between the EU and Myanmar have thawed, and taken on a certain momentum.

The Council of the European Union approved in July 2013 a framework of policy for Myanmar, which envisages establishment of a “trade and investment partnership”, including reinstatement of Myanmar’s GSP preferences and negotiation of an Investment Agreement.Footnote 46 In 2013, the EU repealed legislation suspending Myanmar’s benefits under its GSP programme. Myanmar became a beneficiary of the EU’s Everything But Arms (EBA; duty-free quota-free access except for arms) programme as of 1 January 2014.Footnote 47

While the EU has concluded other FTAs, the focus in this article is on the EUSFTA, and in particular, its investment obligations.

The EU-Korea FTA: The EU’s First FTA with an Asian State

The EU-Korea FTA, which entered into force in July 2011, is the first FTA that the EU has signed with an Asian state but as its negotiations commenced before the conclusion of the Lisbon Treaty (which confers exclusive investment negotiation competence on the EU) it contains no investment chapter.Footnote 48

CETA: The EU’s First Post-Lisbon FTA Containing Investment Provisions

The EU-Canada Comprehensive and Economic Trade Agreement (CETA), concluded on 18 October 2013, is the first post-Lisbon FTA with investment rules.Footnote 49 Before the release of the Investment Chapter of CETA, the EU published a Fact Sheet explaining key contents of this chapter.Footnote 50 The text of the Chapter was released in September 2014 as part of the consolidated text of the treaty.Footnote 51 More will be said about these provisions below.

The EU-Singapore FTA: The EU’s First Post-Lisbon FTA with an ASEAN/Asian State Containing Investment Provisions

According to a study of the economic benefits of the EUSFTA released on 24 September 2013, the EU views FTAs with individual ASEAN members, such as the EUSFTA, are “stepping-stones” or “building blocks” for an EU-ASEAN FTA.Footnote 52 The EUSFTA is thus viewed as a trailblazer, set to spur further FTAs with other ASEAN member states.Footnote 53

Negotiations for the EUSFTA were launched in March 2010 and were completed by December 2012. An initialled text was released on 20 September 2013. The text of the Investment Chapter was released in October 2014.Footnote 54

The EUSFTA may be viewed as the EU’s continuing process of investment rule-setting as it is likely to reflect many of the investment provisions that are in the CETA. Concerning investment protection with Asian (and other) partners will be explained in greater detail below. First, one must appreciate the current, broader EU investment treaty negotiating agenda, as explained in the next section.

A New Generation of EU Trade and Investment Agreements

General Philosophy

Certain themes and ideas are discernible in the EU’s negotiating objectives for new FTAs.

First, the EU is mindful that non-EU partners are of diverse economic and developmental standing. Consequently, it has stated that it would be open to adapting negotiations to consider this. Specifically, in the Commission’s Communication, Towards a Comprehensive European International Investment Policy, 2010, it was stated:

  • … a one-size-fits-all model for investment agreements with 3rd countries would necessarily be neither feasible nor desirable. The Union will have to take into account each specific negotiating context. The interests of our stakeholders as well as the level of development of our partners should guide inter alia the standards the Union sets in a specific investment negotiation. …

  • The Union should go where its investors would like to go, just like it should pave their way abroad, through the liberalisation of investment flows. Markets with significant economic growth or growth prospects present a particular opportunity in the current increasingly competitive environment. It is important that EU investors have access to these markets and that amid the changes that these economies might be undergoing, benefit from the availability of sufficient guarantees for fair and predictable treatment. The EU’s interests in investment negotiations would also be determined inter alia by the political, institutional and economic climate of our partner countries. The ‘robustness’ of investor protection through either host country or international arbitration would be important determinants in defining priority countries for EU investment negotiations. In particular, the capacity and the practice of our partners in upholding the rule of law, in a manner that provides a certain and sound environment to investors, are key determinants for assessing the value of investment protection negotiations.Footnote 55 (Italic emphasis added.)

Secondly, in respect of dispute settlement, the EU seeks certainty and consistency under its FTAs:

The atomisation of disputes and interpretations. Consistency and predictability are key issues and the use of quasi-permanent arbitrators (as in the EU’s FTA practice) and/or appellate mechanisms, where there is a likelihood of many claims under a particular agreement, should be considered; […]Footnote 56

The lack of consistency between investor-State arbitral tribunals and the resulting uncertainty in the interpretation of core investment provisions (such as MFN clauses, for one) has led to a great deal of debate and calls for reforming the whole investor-state dispute settlement system that exists today.Footnote 57

While it appears from the above statements that the EU generally expects to include investor-State dispute settlement mechanisms (ISDS) in its treaties, it appears that there could be limited exceptions. In January 2014, the EU Trade Commissioner announced that the EU would hold consultations on its investment treaty dispute settlement provisions in the period leading up to the next negotiating round (in March 2014) for the Trans-Atlantic Trade and Investment Partnership (TTIP) with the US,Footnote 58 in light of several objections to ISDS being included.Footnote 59

Thirdly, the EU aims to have a balance between the right to regulate and the need to protect investors.Footnote 60 This is an important precept, particularly for the Asian states that are negotiating with the EU. Fourthly, the EU has outlined the scope and standards it seeks in ISDS in FTAs.Footnote 61

Specific Guarantees Sought

Before the EUSFTA investment chapter was released to the public,Footnote 62 and beyond the general contours sketched out in the Communication, the EU had made available a Fact Sheet on Investment Protection and Investor-to-State Dispute Settlement in EU Agreements of November 2013Footnote 63 which provided important and useful indications of the chapter’s likely contents.

With regard to treatment, the EU has spelt out the four key guarantees for inclusion: most favoured nation, national treatment, fair and equitable treatment, transfer of capital, expropriation provisions.Footnote 64 These will be buttressed by inclusion of an investor-State dispute mechanism.

With regard to the obligations relating to indirect expropriation and fair and equitable treatment (FET), the EU texts with both Canada and Singapore provide more detailed guidance on both these notions than before.Footnote 65 In several FTAs indirect expropriation is not defined, and it is only in some recent agreements that limitations on this obligation have begun to be included.Footnote 66

In the context of addressing indirect expropriation claims, the CETA and the EUSFTA, include provisions to safeguard a State’s right to regulate and pursue legitimate public policy objectives.Footnote 67 Where that regulatory action is non-discriminatory and taken to protect the public interest, “the right of the state to regulate should prevail over the economic impact of those measures to the investor”.Footnote 68 It remains to be seen as to what the actual treaty text will look like.

The CETA provides that a breach of the FET obligation arises in the following cases:

  • Denial of justice in criminal, civil or administrative proceedings;

  • Fundamental breach of due process, including a fundamental breach of transparency, in judicial and administrative proceedings.

  • Manifest arbitrariness;

  • Targeted discrimination on manifestly wrongful grounds, such as gender, race or religious belief;

  • Abusive treatment of investors, such as coercion, duress and harassment.Footnote 69

By comparison, the “scoping list” of the FET provision in the EUSFTA differs, stating the following:Footnote 70

  • 2. To comply with the obligation to provide fair and equitable treatment set out in paragraph 1, neither Party shall adopt measures that constitute:

  • (a) Denial of justice12 in criminal, civil and administrative proceedings;

  • (b) A fundamental breach of due process;

  • (c) Manifestly arbitrary conduct;

  • (d) Harassment, coercion, abuse of power or similar bad faith conduct; or

  • (e) A breach of the legitimate expectations of an investor arising from specific or unambiguous representations13 from a Party to induce the investment and which are reasonably relied upon by the investor.

  • 13 For greater certainty, representations made to induce the investments include the representations made to convince the investor to continue with, not to liquidate or to make subsequent investments.

This list of guiding factors comes as no surprise, as they have been adopted by various arbitral tribunals in the past.Footnote 71 In a way, this is a kind of “codification” of such tribunals’ reasoning of the FET standard. The language of the final text, however, and its exact scope, again, remain to be seen.

The negotiated text of the Investment Chapter of the EUSFTA was made publicly available in October 2014. The text, with other chapters, awaits “legal scrubbing” at this time of writing, and thereafter, ratification by the EU and implementing legislation in Singapore. The Chapter includes provisions addressing, inter alia, the following matters in relation to investor-State disputes:Footnote 72

  • Prevention of claims by investors that are “manifestly without merit” and “unfounded as a matter of law”Footnote 73;

  • Transparency in dispute proceedings; while the UNCITRAL Rules on Transparency in Treaty-Based Arbitration that came into effect in 2014Footnote 74 are explicitly made applicable in the CETA text, the EUSFTA incorporates its own, modified transparency provisionsFootnote 75;

  • A Code of Conduct for arbitrators and mediators;

  • The possibility to consider in certain cases, an appellate mechanismFootnote 76;

  • Provisions on the role of a Trade Committee to adopt interpretations of provisions in the EUSFTA.Footnote 77

Article 9.4 reflects the EU approach mentioned above, and relates fair and equitable treatment with some of the factors mentioned in the EU fact sheets, such as denial of justice in criminal, civil and administrative proceedings, a fundamental breach of due process and manifestly arbitrary conduct.

Art. 9.4.5 sets out a relatively specific provision on frustration or undermining of specific commitments made in written contractual agreements:

  • 5. Where a Party, itself or through any entity mentioned in article 1 paragraph 5, had given any specific and clearly spelt out commitment in a contractual written obligation14 towards an investor of the other Party with respect to the investor’s investment or towards such an investment, that Party shall not frustrate or undermine the said commitment through the exercise of its governmental authority15 either:

  • (a) deliberately; or

  • (b) in a way which substantially alters the balance of rights and obligation in the contractual written obligation unless the Party provides reasonable compensation to restore the investor or investment to a position which it would have been in had the frustration or undermining not occurred.

  • 14 For the purposes of this paragraph, a “contractual written obligation” means an agreement in writing, entered into by both parties, whether in a single instrument or multiple instruments, that creates an exchange of rights and obligations, binding both parties.

  • 15 For the purposes of this article, a Party frustrates or undermines a commitment through the exercise of its governmental authority when it frustrates or undermines the said commitment through the adoption, maintenance or non-adoption of measures mandatory or enforceable under domestic laws.

While this provision is not crafted in the form of a conventional, broadly-worded “umbrella clause”, it does create a separate treaty obligation that could be violated in the manner set out in (a) and (b) in relation to contractual obligations between a State and an investor.

Notably, a provision in the CETA on expropriation and intellectual property rights (and an accompanying Declaration by the Parties) has not been included in the EUSFTA.Footnote 78

However, the EUSFTA Investment Chapter Annex provides as follows:

  • Annex 9-C to the Investment Protection Section

  • EXPROPRIATION AND INTELLECTUAL PROPERTY RIGHTS

  • For greater certainty, the revocation, limitation or creation of intellectual property rights, to the extent that these measures are consistent with TRIPS Agreement and Chapter 11 (Intellectual Property) of this Agreement, do not constitute expropriation. Moreover, a determination that these measures are inconsistent with the TRIPS Agreement and Chapter 11 (Intellectual Property) of this Agreement does not establish that there has been an expropriation.

Dispute Settlement

Apart from the above observations, which relate to interpretation under ISDS, the following are other features of ISDS under the EUSFTA.

To permit and encourage parties to consider the use of alternative dispute resolution methods, Chapter 16 of the EUSFTA provides for a Mediation Mechanism.Footnote 79 As not all ISDS provisions are accompanied by such explicit processes, the parties here appear to place emphasis on the availability and use of such means to settle disputes. Such a stance would be consistent with the general interest in the EU and in Singapore to promote the use of mediation.

Arbitration hearings will be open to the public, unless the two States decide otherwise.Footnote 80 This is not new for Singapore, as the USSFTA, which came into force much earlier, had already envisaged open hearings.Footnote 81

The EUSFTA includes provisions on the remuneration of arbitrators, linking these to ICSID Regulation standards.Footnote 82 In contrast, the CETA contains more control mechanisms.Footnote 83 These provisions reflect the EU thinking that the remuneration and expenses of arbitrators would be “based on standards of comparable international dispute resolution mechanisms in bilateral or multilateral agreements.” As explained by the EU, the aim of such provisions is to take “action against spiraling costs through effective limits to the costs of arbitration”, such action being described as a “first in an ISDS mechanism”.Footnote 84

Finally, the EUSFTA will also include provisions governing the conduct of arbitrators, to deal with matters such as conflicts of interest.Footnote 85 This has been the subject of some recent challenges in ICSID arbitrations and the provisions are intended to forestall such challenges in an arbitration. While these are important guiding provisions, they do not appear to address with specificity, for example, challenges which are based on an arbitrator who may have, before appointment, expressed a particular view on relevant legal principles in academic or professional journals or is in a law firm whose other members may be involved in advising related entities.Footnote 86

Other Aspects Related to Investment: Intellectual Property and Medicines

TRIPS-plus FTA provisions,Footnote 87 especially as they pertain to regulation of patenting and sale of pharmaceutical products, have been a source of global debate.Footnote 88 Such provisions provide investors who hold patents and other legal rights in the FTA States to gain legal protection via the FTA’s provisions governing IP rights and pharmaceutical product approval licensing, and on ISDS. In many FTAs, IP rights (such as pharmaceutical patents) fall within definitions of protected “investments” under investment provisions, with the result that challenges under ISDS may be brought if a violation of rights related to such investments are claimed.

Under the USSFTA Singapore had already agreed to certain TRIPS-plus commitments. The EUSFTA text of Chapter 11 on Intellectual Property Rights appears to impose far fewer TRIPS-plus requirements for these products. However, Chapter 2, Annex 2-C Pharmaceutical Products and Medical Devices does impose a number of new disciplines for Singapore relating to, inter alia, listing, pricing and reimbursement of pharmaceutical products.Footnote 89

Other ASEAN TPP countries, that the EU is in FTA negotiations with, are Malaysia and Vietnam. The EU FTA negotiators will no doubt be monitoring the IP negotiations of the TPP to assess what these two countries might agree to. By way of general note, it was reported recently that incoming Chilean TPP negotiators have “drawn a red line” (or ceiling) at the US-Chile FTA level of pharmaceutical IP rights protection.Footnote 90

Conclusion

As the EUSFTA negotiations are the EU’s first to be completed among those with ASEAN members, negotiators in the other ASEAN negotiating States will no doubt be studying the released text as a matter of reference, comparison and negotiation. These other members may have offensive and defensive negotiating interests that differ from those of Singapore, so that they may seek some variations in specific areas. Examples of such areas are trade in goods (such as agriculture, machinery and transport equipment) trade in services, government procurement and the level of protection of IPRs, including those relating to pharmaceutical products and services related to their distribution. It is also not clear if they will accept the insertion of an umbrella clause in their treaties with the EU, given that such clauses have led to somewhat surprising (and costly) challenges elsewhere, as mentioned. The investment provisions, given that ASEAN members have varying reservations in past economic agreements, may be a further area in which negotiations may take more time.Footnote 91

For States that may have GSP preferences that have an imminent expiry date, there could be an added impetus to conclude a FTA with the EU.Footnote 92 ASEAN States such as Indonesia, Philippines, Thailand and Vietnam are beneficiaries under the EU’s 2014 GSP scheme.Footnote 93 As of 2014, Malaysia no longer benefits under the EU’s GSP scheme.Footnote 94

The EUSFTA signals a first between the EU and Singapore in several ways, and may well lead to conclusion of further FTAs soon between other ASEAN members and the EU. For the moment, it would appear that an EU-ASEAN agreement will take some time to materialise.Footnote 95