Economic Policy Program

July 2011

Summary: The economic relationship between the United States and the European Union (EU) is unique as it is based on investment rather than on trade. Yet, in a sense they have no investment relationship: while the United States has investment treaties with most of the EUs 27 member states, it has none with the EU itself. On one hand, the substantial investment across the Atlantic may indicate no legal framework is needed between them. And the political controversy surrounding investment negotiations in both the United States and Europe could argue against starting a negotiation that could raise acrimony rather than the amity its meant to create. But a Transatlantic Investment Agreement, if done properly, would be useful as it could remove lingering doubts about U.S. and EU openness to foreign investment, liberalize new areas for investment between them, and strengthen international investment law, thus helping improve business climates in other countries. This paper lays out a path for the United States and European Union to recognize, consecrate, and even celebrate this unique economic relationship.

The United States, European Union and International Investment

by Peter H. Chase
The economic relationship between the United States and the European Union (EU) is unique as it is based on investment rather than on trade.1 By the end of 2010, U.S. firms had invested nearly $1.5 trillion in the EU, while European firms had invested an equivalent amount into the United States. These investments have combined annual sales exceeding $4 trillion, a number which dwarves both their bilateral trade and their trade/investment relationships with any other country, including China. And yet, the United States and EU in a sense have no investment relationship: while the United States has investment treaties with most of the EUs 27 member states,2 it has none with the EU itself. This anomaly is easily explained: until recently, the EU lacked the power to conclude investment agreements. That
1 Daniel Hamilton, who heads the Johns Hopkins Center for Transatlantic Relations, was one of the first to underscore this difference with the term deep integration, see, for example, Deep Integration: How Transatlantic Markets are Leading Globalization, Hamilton, Daniel S. and Quinlan, Joseph P., eds., Center for Transatlantic Relations and Center for European Policy Studies, 2005. 2 The 27 EU member states are Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom.

changed when the Lisbon Treaty,3 which entered into force December 1, 2009, included Foreign Direct Investment in the EUs Common Commercial Policy.4 These three words Foreign Direct Investment have enormous consequence. With them, hundreds of EU member state investment treaties (BITs)5 are now arguably inconsistent with EU law, and the European Commission now has the power to negotiate investment treaties on behalf of the EU and its member states. The Lisbon Treaty changes also raise the question: should the United States and the European Union conclude an investment treaty? On one hand, the substantial investment across the Atlantic may indicate no legal framework is needed between them. And the political controversy surrounding investment negotiations in both the United States and Europe could argue against starting a nego3 Formally, the Treaty on the European Union and the Treaty on the Functioning of the European Union, signed on 13 December 2007 in Lisbon and entered into force December 1, 2009; see Official Journal of the European Union, 2010/C83/01of March 30, 2010, http://eur-lex. europa.eu/JOHtml.do?uri=OJ:C:2010:083:SOM:EN:HTML 4 In Articles 3 and 207; see below. 5 Also known as Investment Protection and Promotion Agreements, or IPPAs.

1744 R Street NW Washington, DC 20009 T 1 202 745 3950 F 1 202 265 1662 E info@gmfus.org

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tiation that could raise acrimony rather than the amity its meant to create. But a Transatlantic Investment Agreement, if done properly, would be useful as it could remove lingering and even increasing doubts about U.S. and EU openness to foreign investment, liberalize new areas for investment between them, and strengthen international investment law, thus helping improve business climates in other countries. Whether such an agreement could be done properly is open to question: the EU is still debating how it should use its new powers, and increasing defensiveness about inward investment from third countries in particular China could lead both the United States and EU to adopt policies that would also affect investment flows between them. This defensiveness is exacerbated by a misunderstanding about the key provisions of investment treaties, which could lead both Washington and Brussels to favor provisions that undermine rather than promote investment flows. This paper lays out a path for the United States and European Union to recognize, consecrate, and even celebrate their unique economic relationship. It does so by providing an overview of international investment treaties; by detailing the background to and changes in the Lisbon Treaty; by discussing the issues the EU faces as it develops its approach in this new policy area, including in negotiations now underway with Canada, India, and Singapore; and by suggesting a way forward for the transatlantic investment relationship. I. International Investment Treaties Twenty years ago, a proper Transatlantic Investment Agreement would have been fairly simple to negotiate investment treaties were largely seen as technical and noncontroversial. That is no longer true, for investment agreements have become highly politicized since the North American Free Trade Agreement (NAFTA) and the OECD Multilateral Agreement on Investment (MAI) negotiations in the mid-1990s. Nongovernmental organizations, long concerned about the power of multinational corporations, became anxious about the constraints investment treaties could put on domestic legislation after a dispute over California environmental legislation erupted under NAFTA. Although in the end the investors claim against the legislation was rejected, these groups argued the MAI could somehow stop governments from taking steps needed to protect consumers and the environment.6 The MAI died in large part under the weight of the protests, and ever since international investment treaties have come under intense political scrutiny. As a result, for years the United States has been unable to revise its model investment treaty, used as the template for negotiations with individual countries. This is unfortunate, as the opposition to international investment treaties derives from a misunderstanding and exaggeration of their main provisions.

Twenty years ago, investment treaties were largely seen as technical and noncontroversial. That is no longer true.
International investment treaties some 2,500 of which are in force today have one key purpose: to encourage inflows of the capital and technology needed for economic growth by reducing legal and political risk.7 Especially in developing countries, domestic resources cannot generate the growth they need to improve the lives of their people; foreign capital is required as well. These countries recognize, however, that foreigners may be wary of putting money into countries about which they know little, and will do so only if they get a high enough rate of return to cover the perceived risks including the possibility they may never see their money again. Investment agreements provide guarantees to help assuage investors concerns, and

6 Ironically, the EU itself, which could be considered the first multilateral investment agreement, has never shied away from adopting stringent environmental and consumer protection legislation. Note that intra-EU foreign direct investment shot from $500 billion in 1994 to $9.7 trillion by 2009. 7 For more detailed elaboration on the legal provisions of investment treaties, and particularly those of the United States, see for example Kenneth J. Vandevelde, Bilateral Investment Treaties: History, Policy and Interpretation, Oxford University Press, March 2010.

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reduce the need for tax holidays and other inducements to attract foreign capital. Developing countries also enter into investment agreements because the obligations are not onerous. As detailed below, U.S. and EU investment agreements (and most others) have centered on three main provisions on national and mostfavored-nation (MFN) treatment, expropriation and transfers, enforced by state-to-state and investor-to-state dispute settlement mechanisms. Treatment: Foreign investors are always subject to the laws of the country in which they operate, and nothing in investment treaties circumscribes the ability of governments to adopt laws and regulations. (The U.S. Senate would surely never ratify them if they did!) The treaties merely require that, in adopting laws and regulations, signatory governments will not treat foreign investors differently than domestic citizens just because of their nationality. The United States and EU governments accept such national treatment constraints because in general both oppose discrimination based on nationality, and believe laws and regulations that apply equally to all achieve the greatest public good. One of the main differences between U.S. and European investment agreements is that U.S. treaties allow an investor to establish a business in the other country on the same basis as any citizen in it. If for some reason a government chooses to circumscribe this right of establishment, it spells out those exceptions. EU member state Investment Promotion and Protection Agreements (IPPAs), on the other hand, traditionally stipulate that in establishing a business, an investor from the other country only has the same rights as all other foreign investors, thus granting so-called most favored nation (MFN) treatment. The complications this raises for the EU will be discussed below. Expropriation: All governments have the right of public domain to take private property. Investment treaties do not preclude expropriation, but they generally do guarantee that expropriations will be for a public purpose (for instance, acquiring rights of way for public infrastructure) and that the expropriating government will compensate the owner of the property. In particular, in its BITs, the United States seeks for its investors and provides investors of the other

One of the main differences between U.S. and European investment agreements is that U.S. treaties allow an investor to establish a business in the other country on the same basis as any citizen in it.
country prompt, adequate, and effective compensation so that payments are made without undue delay, reflect the full market value of the investment,8 and can be easily remitted to the investor. EU member state agreements have the same intent, if slightly different wording. In both cases, the widest possible definition of investment to include intangible property such as intellectual property rights, rights under licensing agreements and good will is used to ensure compensation of the full value of the investment expropriated. Transfers: To attract investment, countries also promise in investment agreements that the investor will always be able to repatriate the investment and any earnings from it. The transfers provision also allows the investor to put additional money into the investment to maintain and grow its value. All U.S. and EU member state investment agreements center on these three main obligations; the remainder of the treaties are the fine print clarifying and limiting them (increasingly so, in the case of the United States). But the treaties also include dispute settlement mechanisms to enforce the obligations, both between the governments that sign the treaties and between the host country and the investor. The investor-to-state mechanism is often controversial, but again unnecessarily so. Investors can and do go to domestic
8

What a willing buyer and seller would agree to.

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court to enforce their legal rights. But the investor-to-state mechanism in investment agreements has three distinct purposes. It addresses the international obligations of the host government under the treaty, when steps taken legally under domestic law allegedly violate the treaty guarantees on discrimination, expropriation, or obstruction of transfer. It ensures a neutral venue to hear the complaint when domestic courts may have difficulty dealing with differences between domestic law and international obligation. And it depoliticizes the conflict, so the government of the investor does not have to decide whether to sue the host country, and investors need not depend on their own governments to undertake what is often a diplomatically sensitive step to protect their investments. U.S. and EU member state investment agreements refer disputes to the World Banks International Center for the Settlement of Investment Disputes (ICSID) or provide alternative means of arbitration. II. The Evolution of EU Law on Investment Policy While EU member state investment treaties contain all these provisions (except, as noted, on national treatment on establishment), the EU itself, and specifically the trade negotiators in the European Commission, had only limited engagement with international investment agreements before the Lisbon Treaty entered into force at the end of 2009. Put simply, prior to Lisbon, member states could promote their firms external trade and investment activities as long as they did not implicate the EU internal market, customs union or trade policy. Given this limitation, member state Investment Promotion and Protection Agreements allowed third country investors to establish investments only on a most favored nation basis because this did not undermine EU measures related to the internal market. Further, until Lisbon, the EU treaties reserved expropriation to the member states, so the EU would not have been able to include this critical provision in any EU-level agreement. This division began eroding with the 1992 Maastricht Treaty, which for the first time included freedom of financial flows to and from third countries in the chapter on Freedom of Capital Movements. All member state exceptions to such external free flows of capital were frozen as of December 31, 1993,9 and while the EU could liberalize these restrictions by a qualified majority vote of the member states in Council, they could only increase restrictions on capital movements by unanimous vote. The WTO General Agreement on Trade in Services also strengthened EU competence on international investment, since the EU as a whole committed to permitting establishment of foreign service providers on a national treatment basis in specified service sectors/activities. Member states were comfortable with this positive list approach as they could control it and as it added to, rather than overlapped with, their IPPAs. Subsequent EU trade agreements also included positive list provisions on establishment of investments in the services sector. The Lisbon Treaty and its Implications for IPPAs The Lisbon Treaty changed all this. It gave the European Union itself legal personality,10 significantly broadening the range of issues for which the EU could enter into international obligations, whereas the predecessor European Communitys remit had been generally limited to the economic field. The Lisbon Treaty made the Common Commercial Policy the exclusive competence of the EU,11 effectively precluding member states from engaging in anything related to this area. And it added Foreign Direct Investment to the Common Commercial Policy.12 In retrospect, member states may not have fully realized the implications of these changes certainly the negotiators of

Prior to Lisbon, member states could promote their firms external trade and investment activities as long as they did not implicate the EU internal market, customs union or trade policy.
4

9 See the Treaty of the European Union (Maastricht), Articles 56 and 57, found for instance at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:12006E/ TXT:EN:HTML. 10 Treaty on the European Union (TEU), Article 1. 11 Treaty on the Functioning of the European Union (TFEU), Art. 6. 12 TFEU Art. 207.

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The Lisbon Treaty made the Common Commercial Policy the exclusive competence of the EU, effectively precluding member states from engaging in anything related to this area.
investment agreements in member state capitals appear to have missed them. The first implication is that all IPPAs concluded by any member state after it entered the EU13 became immediately inconsistent with EU law because by definition they contain provisions affecting the EUs now redefined common commercial policy and because there was no transition period. To address this, the EU Commission in July 2010 proposed a regulation14 to provide a transition for phasing out member state IPPAs.15 Having finally won control over investment negotiations after ten years of trying, the Commission could afford a soft line. Acknowledging the importance of legal stability to long-term investments, the Commission said it would not force member states to terminate IPPAs. Instead, it reserved the right to ask for changes in provisions otherwise inconsistent with the EU Treaty (as it legally had to), but said those agreements could remain in force until an EU-level agreement substituted for the IPPAs member states might have with a country. The Commission even indicated that under certain circumstances, member states would be allowed to conclude additional bilateral investment agreements. In the meantime, as

discussed below, the Commission offered thoughts about what EU-level agreements should look like. Perhaps understandably, many member state investment negotiators especially from Germany and the Netherlands reacted strongly against the proposed regulation, arguing that the Commission undermined the legal certainty of the agreements simply by offering the proposal. They clearly felt that the Commission had done so mainly to underscore that it holds legal leverage as it seeks member state agreement to enter into negotiations on new EU-level investment treaties. For its part, in May 2011, the European Parliament16 argued that the Commission should not seek changes to existing agreements absent a serious inconsistency with EU law, but that the Commission should seek to negotiate EU-level agreements quickly. III. Shaping the EUs New Approach to International Investment On the day it proposed the regulation to grandfather member state IPPAs, the Commission also offered a Communication17 on the EU and international investment. In the Communication, the Commission again briefly explained its approach to member state agreements, underscored the importance of foreign investment to developing countries, and discussed why any EU-level agreement should provide for nondiscrimination (national and MFN treatment), free transfers, guarantees on expropriation, and investor-state dispute settlement all generally consistent with previous member state approaches. It also suggested that the Commission would look first to conclude investment agreements with countries with which the EU has on-going trade agreement negotiations including in particular Canada, India, and Singapore. The devil, as always, is in the details. A number of member states, including in particular Germany, the United Kingdom, and the Netherlands, insist that any EU-level agreement must provide protections at least as strong as
16 European Parliament legislative resolution of 10 May 2011 on the proposal for a regulation of the European Parliament and of the Council establishing transitional arrangements for bilateral investment agreements between Member States and third countries, found at http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+TA+P7TA-2011-0206+0+DOC+XML+V0//EN. 17 Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions, Toward a Comprehensive European International Investment Policy, COM(2010) 343, July 7, 2010.

13 International agreements entered into prior to entry into the EU benefit from grandfathering in TFEU Art. 351. 14 Commission Proposal for a Regulation of the European Parliament and of the Council establishing transitional arrangements for bilateral investment agreements between member states and third countries, COM(2010) 344, July 7, 2010, found at http://trade. ec.europa.eu/doclib/docs/2010/july/tradoc_146308.pdf. 15 While IPPAs became illegal under EU law, they could remain in force unless the Commission sued the member state(s) to terminate them, or the member state(s) did so voluntarily.

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their IPPAs; the European Parliament, in its response to the Commissions Communication,18 called for robust protections, but added that the agreements should also enshrine the governments right to regulate19 and that the Commission should consult regularly with the European Parliament during any negotiations (reflecting some pique that the Parliaments only real involvement in negotiations is at the very end of the process, when it must consent to an agreement before it can enter into force). Prior to entering into negotiations, the Commission must receive member state approval for its proposed negotiating approach. It proposed three mandates to open investment talks with Canada, India, and Singapore in January 2010. These are normally confidential, but the proposal for India has been published by bilaterals.org;20 the others presumably follow similar lines. And, unfortunately, the draft mandate is ambiguous in too many areas, including, importantly, about the Commissions proposed approach to establishment of investments, free transfers, and investor-state dispute settlement. While some of the ambiguity is intended to preserve flexibility for Commission negotiators, these issues should be reviewed carefully if the member states and European businesses truly want the highest possible level of protection for their investments. Establishment: While the right of establishment will be covered, the draft negotiating mandate does not specify whether the Commission will use a positive or negative approach, with the first allowing establishment of investments in explicitly listed sectors (the WTO services approach) and the latter permitting all investments on a national treatment basis unless explicitly excepted. The different approaches result in very real practical, economic, and legal implications. Practically, listing all possible sectors in which investment can come in without discrimination is difficult. Treaties last a long time,21 and, as the last decade has shown, new technology can develop new industries
18 European Parliament resolution of 6 April 2011 on the future European international investment policy, found at http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-// EP//TEXT+TA+P7-TA-2011-0141+0+DOC+XML+V0//EN 19 Ibid, para 6. 20 See bilaterals.org, http://bilaterals.org/spip.php?article18960, posted February 14, 2011. 21 The relevant U.S.-UK agreement, the Convention to Regulate Commerce, dates from 1815.

almost overnight. Amending a treaty to cover those new sectors is difficult, requiring, among other things, reratification. A negative list approach avoids these pitfalls. Further, a negative list makes more economic sense, because it allows an investor in a permitted area to engage in associated activities that the negotiators may not have thought of listing. One example could be an investor who would like to establish a trucking company to deliver the goods produced in its factory. If that activity has not been explicitly permitted, then a final potential legal problem arises: in the event of an expropriation, is the part of the investment (here, trucking) fully included in the valuation? Unfortunately, indications are the Commission will use a positive list approach, at least in the case of Canada, with the provisions on establishment in a separate chapter from those governing the protection of investments.

Treaties last a long time, and, as the last decade has shown, new technology can develop new industries almost overnight.
Expropriation: The Commissions approach to expropriation, and indeed the broad definition of investment which helps define the value, appears to carefully track member state traditions.22 Transfers: While the Commission states in its proposed mandate that it will ensure the right of free transfers in agreements it negotiates, the problem lies in what it doesnt say. In 2007, the Commission brought the BITs of Austria and Sweden before the European Court of Justice (ECJ), arguing that the free transfers obligations in them were inconsistent with the capital movements provisions of the Treaty of European Union (TEU). In March 2009, the ECJ sided with the Commission, stating that because the TEU permits the Council to adopt restrictions on capital
22 Curiously, in its Communication (see note 20), the Commission refers to prompt, adequate, and effective compensation for expropriation, the standard U.S. language; in the mandate, it refers to payment of adequate compensation, supra at note 23.

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movements (albeit only with unanimity), member state BITs must also allow restrictions. The Court then explicitly extended this ruling to the transfers provisions of all member state investment agreements.23 The Commission has not yet insisted that the member states conform their agreements to the ruling, perhaps because it does not want to further roil the waters. But, in addition, there seems to be some disagreement about the meaning of the ruling. If, as some Commission policy officials argue, the ECJ merely intended to say that member states cannot prejudge Council decisions, that might be acceptable. However, if, as some Commission lawyers insist, the ECJ ruling means that even EU-level agreements must include a clause allowing a government in exceptional circumstances to block investors access to their capital and earnings, this decision would severely weaken a cornerstone of international investment law. Investor-State: The Commission in both its Communication and in its proposed mandate for the Indian investment agreement clearly intends to include investor-state dispute settlement. Two complications arise, however: one concerning how the EU and its member states are covered, and one concerning the EUs membership in ICSID and the Convention on the Recognition and Enforcement of Arbitral Awards (the New York Convention).24 The question of liability stems from the nature of investment agreements, which cover all measures a government might take that affect investments. This encompasses measures adopted by local, regional, and member state governments as well as by the EU. Some of these may well fall into the exclusive competence of the member states and their constituent governments. Parties entering into such agreements with the EU will want to ensure such measures are covered, especially since the Lisbon Agreement is so clear in stating that the EU only has powers that are explicitly conferred on it by the Treaties. The clearest way to address this would be to have the member states also sign and ratify any investment agreement other nations make with the EU, although the need for each government to ratify would delay implementation of such accords. The EU should also consider including an article explicitly providing for joint and several liability on its side, so the other party and its investors do not need to worry which level of government is liable for an infringement of rights under the agreement. 25 EU lawyers contend this is not necessary, and that decisions by the European Court of Justice make clear that the EU as such can enter into international agreements on behalf of the member states for issues within those governments remit, but an explicit provision, even in the form of a protocol, would be useful for investor certainty. While the EU is not a member of ICSID and cannot be a member as long as it is not a member of the World Bank this is not an important problem. Investment agreements frequently provide for alternative fora for dispute settlement, including through ICSIDs Additional Facility (for complaints when one party to the agreement is not in ICSID) and ad hoc arbitration.26 That said, ICSID is wellknown as an independent and respected forum for hearing investment disputes, and other countries that might enter into an investment agreement with the EU might well consider supporting its membership. This would entail
25 The Commission recognizes the importance of this, noting in its Communication on a future EU investment policy (supra, page 10), Given the exclusive external competence, the Commission takes the view that the European Union will also be the sole defendant regarding any measure taken by a Member State which affects investments by third country nationals or companies falling within the scope of the agreement concerned. The EU is apparently adopting this approach in its accession to the European Convention on Human Rights; see Art. 4 of draft accession agreement, CDDH-UE(2001)10, available on COE website. 26 This was the approach taken in the European Energy Charter Treaty, to which the EU is a party.

Having the EU join the World Banks International Center for the Settlement of Investment Disputes makes sense, since the EU is the worlds largest provider of development assistance.
23 See European Court of Justice judgments of 3 March 2009 in Commission v Austria (Case C-205/06) and of 3 March 2009 in Commission v Sweden (Case C-249/06). 24 http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvention.html

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amending the underlying charter to the World Bank, which currently allows only for the membership of sovereign nation states. Having the EU join ICSID (and the World Bank) makes sense, since the EU is the worlds largest provider of development assistance. That the EU is not a party to the New York Convention is potentially more problematic, as this convention is crucial to ensuring investors are able to get full recompense. IV. Implications for the Transatlantic Relationship A U.S.-EU Investment Agreement? The United States has three major equities in the EUs new powers on investment. Washington has long strived to construct a strong common law to protect international investment, and it is important that the EU, as the worlds largest home and host of foreign investment, also presses for strong protections. Further, U.S. subsidiaries in Europe frequently invest under the cover of the EU member state investment treaties (which cover far more countries than the U.S. BITs).27 And Washington may well want to consider whether to enter into a modern investment relationship with the EU to update our older FCNs and BITs.28 The United States should be talking intensively to the EU and the member states about the approach the EU intends to take in its international investment agreements. To date, however, this has not happened in any coherent manner. The U.S.-EU Investment Dialogue, established in 2007 and the appropriate forum for such discussions, has lain dormant since the Obama Administration entered office in January 2009. Although the cabinet-level U.S.-EU Transatlantic Economic Council (TEC) agreed in December 2010 to reinvigorate these discussions, differences in Washington over which U.S. agency should lead the talks have conspired against scheduling a meeting. Informal discussions with Commission officials and with member state governments are important, but lack the force of a whole of government approach under the formal Dialogue. In such a meeting, the U.S. side should be able to clearly explain why a broad definition of investment is necessary; the dangers of the
The United States has 40 BITs in force, including with eight EU member states Bulgaria, the Czech Republic, Estonia, Latvia, Lithuania, Poland, Romania, and Slovakia, see http://tcc.export.gov/Trade_Agreements/Bilateral_Investment_Treaties/index.asp. 28 In addition to the BITs cited, above, the U.S. has treaties of friendship, commerce, and navigation with 12 member states, but has no investment treaty relationship with Portugal, Spain, or Sweden.
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unneeded social, environmental, and right to regulate provisions the European Parliament seeks; the benefits of a negative list on establishment; the critical necessity of having an uninhibited right to free transfers; and the importance of clarity on how obligations attach to the EU and member states. The two sides should also begin discussing whether and how to address the question of the EUs lack of membership in ICSID and the New York Convention. The Dialogue would also be the natural place to discuss broader investment policy issues, including those of concern to the EU. One of these is U.S.-EU collaboration on improving the investment climate in third countries. Both U.S. and EU companies, for example, face arguably unfair competition from state-owned enterprises from third countries, both in those countries and in investments elsewhere. The Dialogue could begin developing language to use in their investment agreements to help discipline such favored enterprises.

Only an agreement that enshrines the highest level of protection and that strengthens our economic relationship makes sense.
U.S. firms that now benefit from EU member state investment protection agreements obviously should also weigh into the debate on these issues. They rightly consider themselves European firms of American parentage, employing over 5 million Europeans in generally high-paying jobs, and as such have standing to be heard. Whether the U.S. and EU should enter into an investment agreement is less clear. The tremendous volume of transatlantic investment over $1 trillion both ways suggests that investors see little political or legal risk that such an agreement is meant to reduce. And given their exposure to investment from the other side, both governments could well take a defensive approach in particular against

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investor-state dispute settlement that would weaken investment protections rather than strengthen them. That would be a mistake. Only an agreement that enshrines the highest level of protection that the United States and EU would seek from any other government and that strengthens our economic relationship makes sense. We have three good reasons to conclude such a high-level agreement. The Lisbon Treaty changes and the European Court of Justice rulings against the transfers provisions in EU member state investment agreements both affect the legal framework of BITs and FCN treaties that has guided the transatlantic investment relationship until now. In addition, as unfortunate as it is to say, both have reason for concern about the openness to investment on the other side of the pond, so there is a risk to address. Finally, both can gain substantially in terms of growth and jobs from more investment flows and greater integration. The United States and EU are by far the worlds top two sources and destinations for foreign investment. This reflects both our levels of development and our traditional openness to capital from abroad, which in turn reflects our shared values about a rules-based market economy, nondiscrimination, and the sanctity of private property. We have always welcomed, and should always welcome, additional engagement with our transatlantic partner. Yet concerns in both Europe and in the United States about foreign investment in general and in particular from China and Russia have caused some of our politicians to question our traditional openness to foreign investment. Such concerns are not merited: direct investment always brings in capital and boosts growth. More significantly, it ties companies and countries together, giving them permanent equities that can only be positive. Further, any measure meant to restrict capital flows from one country could all too easily affect flows from others. This was immediately clear in the initial draft of the Gazprom clause29 in the EUs Third Energy package, which ironically would have had precisely the opposite of the intended effect, protecting
29 See Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/55/EC concerning common rules for the internal market in natural gas, COM(2007) 529 of September 19, 2007, Explanatory Memorandum para 1.3, page 7, and Article 1, paragraph (5), proposed a new Article 7(a), page 30.

Gazprom while adversely affecting the United States.30 The same is true of the recent suggestion by two powerful European Commissioners, Commissioner for Enterprise and Industry Antonio Tajani and Commissioner for the Internal Market Michel Barnier, that the EU should consider establishing a process for screening foreign acquisitions of European firms.31 While their concern was about the possibility of Europe losing competitiveness as China buys up European firms and their technology, such economic security considerations could all too easily be applied to U.S. acquisitions. The Tajani/Barnier call for the EU Commissioners to debate this issue has been delayed until the autumn, but it reflects a very real political sentiment in Europe, as does the recent debate in the United States about some potential Chinese acquisitions of U.S. firms. However misdirected these concerns are, a Transatlantic Investment Agreement would protect investments from unintended consequences.32

Any measure meant to restrict capital flows from one country could all too easily affect flows from others.
But further, both the United States and Europe have barriers to foreign investment that make little economic sense in general, and no sense at all in the particular case of the transatlantic relationship. The single best example
30 The proposed language was: Article 7a -Control over transmission system owners and transmission system operators 1. Without prejudice to the international obligations of the Community, transmission systems or transmission system operators shall not be controlled by a person or persons from third countries. 2. An agreement concluded with one or several third countries to which the Community is a party may allow for a derogation from paragraph 1. The Russian Federation would arguably have benefited from subparagraph 2, as it was a signatory to the European Energy Charter Treaty; the United States is not. The paragraph was modified significantly to establish a process for an energy security review by the member states and the Commission in the event a company from a third country gains control over a natural gas transmission network. 31 This letter is not public, but has been circulated in Brussels. 32 While the rights and obligations under the existing network of FCNs and BITs between the United States and European member states might mitigate these adverse effects, these treaties are, as noted, weaker than desired and may not apply to EU-level measures in any event.

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of this is the limit both sides place on foreign ownership and control of their airlines. These controls are a relic of a distant mercantilist era. The EU has moved far beyond the national flag carrier concept that underlies the 1947 Chicago Convention on International Civil Aviation, and the damage of maintaining this approach is obvious in the contortions airlines go through to establish international code-sharing relationships. A U.S.-EU agreement could be used to eliminate such unnecessary restrictions on investment between us, without being subject to free rider considerations through most favored nation obligations in the WTO services agreement or investment agreements we both have with third countries.

About the Author

Peter H. Chase, a nonresident fellow of the German Marshall Fund, is now senior European representative for the U.S. Chamber of Commerce. As the director of investment at the Office of the U.S. Trade Representative from 1990-1992, he negotiated investment treaties and was involved in negotiating the investment provisions in the WTOs Agreement on Trade-Related Investment Measures, the North American Free Trade Agreement, and the European Energy Charter Treaty. He was engaged in EU economic policy issues for the last 18 of his 30 years with the U.S. Department of State. The views expressed in this paper are his own, and do not necessarily reflect those of either the German Marshall Fund or the U.S. Chamber of Commerce.

It is time for the United States and European Union to seriously consider taking their economic relationship to another level.
It is time for the United States and European Union to seriously consider taking their economic relationship to another level. The Transatlantic Economic Council, which is meant to provide strategic guidance to the bilateral relationship, should take this up and recommend it to the next U.S.-EU Summit, tentatively scheduled for November. Should it do so, it would finally have fulfilled its promise of injecting real ambition into the transatlantic economic space. But if we do enter into negotiations on a Transatlantic Investment Agreement, the TEC will need to monitor the negotiations to make sure our officials stay focused on creating the best possible investment agreement between us. If we can do this, we should be willing to open the agreement to other signatories that are willing to accept the same high level of ambition. And in so doing, we can bring to international investment the rules our governments, and our firms, have always sought.

About GMF
The German Marshall Fund of the United States (GMF) is a non-partisan American public policy and grantmaking institution dedicated to promoting better understanding and cooperation between North America and Europe on transatlantic and global issues. GMF does this by supporting individuals and institutions working in the transatlantic sphere, by convening leaders and members of the policy and business communities, by contributing research and analysis on transatlantic topics, and by providing exchange opportunities to foster renewed commitment to the transatlantic relationship. In addition, GMF supports a number of initiatives to strengthen democracies. Founded in 1972 through a gift from Germany as a permanent memorial to Marshall Plan assistance, GMF maintains a strong presence on both sides of the Atlantic. In addition to its headquarters in Washington, DC, GMF has seven offices in Europe: Berlin, Paris, Brussels, Belgrade, Ankara, Bucharest, and Warsaw. GMF also has smaller representations in Bratislava, Turin, and Stockholm.

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