*Karl P. Sauvant, PhD*
*Resident Senior Fellow*
*Columbia Center on Sustainable Investment**
Columbia Law School - The Earth Institute, Columbia University
435 West 116th St., Rm. JGH 825, New York, NY 10027
| p: (212) 854 0689 | cell: (646) 724 5600 e: [log in to unmask]
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* Formerly the Vale Columbia Center on Sustainable international Investment.

“The negotiations of the United Nations Code of Conduct on
Transnational Corporations: Experience and lessons learned” and K. P.
Sauvant and F. Ortino, *Improving the International Investment Law and
Policy Regime: Options for the Future are* available at

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*Columbia FDI Perspectives*

Perspectives on topical foreign direct investment issues
No. 162   December 7, 2015
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Maree Newson ([log in to unmask])

*Preferential investment liberalization under bilateral investment
* How to ensure compliance with WTO law?*
Robert Basedow*** <#1517d29f5624a4b2__edn1>

In the 1990s, the United States (US) – followed by Canada, Japan and, more
recently, the European Union (EU) and China – started negotiating a new
type of bilateral investment treaty (BIT) with third countries. This new
type of BIT does not only comprise post-establishment treatment and
investment protection provisions like traditional BITs, but also contains
substantive investment liberalization commitments. It grants foreign
investors national and most-favored-nation (MFN) treatment at the
pre-establishment stage. So whereas traditional BITs merely create a secure
business environment for established foreign investors in a host economy,
this new type of BIT also seeks to reduce market entry barriers and to
liberalize investment flows arguably on a preferential basis.[1]
<#1517d29f5624a4b2__edn2> In this regard, the new type of BITs resembles
preferential trade agreements. About 4% of all BITs contain substantive
investment liberalization commitments.[2] <#1517d29f5624a4b2__edn3>

BITs with such commitments raise an important legal question, which
policy-makers have mostly ignored. World Trade Organization (WTO) law
imposes obligations on WTO members that intend to engage in preferential
economic integration. Does WTO law – and, more specifically, the General
Agreement on Trade in Services (GATS) – circumscribe the ability of WTO
members bilaterally to liberalize investment flows under BITs?

The GATS does indeed seem to have a bearing on WTO members engaging in the
bilateral liberalization of investment flows under BITs.[3]
<#1517d29f5624a4b2__edn4> The GATS recognizes the “establishment of a
commercial presence abroad” as one of four modes of services trade. The
establishment of such a presence is roughly identical to foreign direct
investment in service sectors. Most international services trade is carried
out through the establishment of a commercial presence, i.e., investment in
the target market. In 2012, 72% of the world’s outward FDI stock was in
services.[4] <#1517d29f5624a4b2__edn5> BITs with substantive investment
liberalization commitments are therefore agreements that liberalize the
statistically most significant mode of services trade.

The GATS contains rules on when and how WTO members may bilaterally
liberalize services trade. GATS Article II states that members doing that
must a priori afford the same market access rights to all other WTO
members. The GATS provides only for two exceptions to this MFN treatment
obligation. First, GATS Article II.2 stipulates that WTO members do not
need to multilateralize market access commitments granted under bilateral
agreements if the members have exempted the relevant sectors and activities
from the MFN obligation in their GATS schedules. Second, they do not need
to grant market access commitments afforded under bilateral agreements to
other members if these agreements fulfil certain economic integration
criteria. GATS Article V inter alia states that such agreements should not
exclude any mode of supply from liberalization efforts from the outset,
have substantial sectoral coverage and match or go beyond countries’ GATS

Most, if not all, BITs with substantive investment liberalization
commitments seem to fall short of the conditions for a preferential
liberalization of service-related investments laid out in the GATS. Hence,
substantive service-related liberalization commitments granted under such
BITs should, in principle, be multilateralized. For one thing, such
commitments granted under BITs often seem to exceed countries’ reservations
tabled in their schedules under GATS Article II.2; only 17 WTO members have
inscribed general BIT-related reservations into their schedules.[5]
<#1517d29f5624a4b2__edn6> Secondly, BITs seem hardly compatible with GATS
Article V. BITs by design only liberalize one of four modes of services
trade. Moreover, many BITs contain substantial reservations. The US, for
example, typically includes vast carve-outs for her states into her BITs.

Few policy-makers seem to be aware that service-related investment
liberalization commitments granted under BITs are likely to be subject to
the MFN obligation enshrined in GATS Article II. One can hardly imagine,
for instance, that the US and the EU put themselves through arduous
negotiations on investment liberalization with China, knowing that any
hard-fought service-related market access commitments are likely to be
instantaneously multilateralized.

So what can policy-makers do to ensure preferential investment
liberalization in compliance with WTO law? First, they could exclude
service-related liberalization commitments from their BITs in order to
avoid the applicability of the GATS. However, this approach is not
desirable. Second, they might only focus on reaching for additional market
access in service sectors excluded from the MFN treatment obligation under
their GATS schedules. Third, they might step up their liberalization
efforts to comply with the requirements of GATS Article V. Countries would
have to ensure broad sectoral coverage across all modes of supply. The
consequent complexity of such investment negotiations, however, would make
it more reasonable to directly engage in full-fledged preferential trade
agreements negotiations.


* <#1517d29f5624a4b2__ednref1> Robert Basedow ([log in to unmask]) is a
doctoral candidate at the London School of Economics and Political Science.
The author is grateful to Rudolf Adlung, Hamid Mamdouh and Pierre Sauvé for
their helpful peer reviews. *The views expressed by the author of this *
*Perspective** do not necessarily reflect the opinions of Columbia
University or its partners and supporters. **Columbia FDI Perspectives**
(ISSN 2158-3579) is a peer-reviewed series.*

[1] <#1517d29f5624a4b2__ednref2> Rudolf Dolzer and Christoph Schreuer,
of International Investment Law*, 2nd ed. (Oxford: OUP, 2012), p. 89.

[2] <#1517d29f5624a4b2__ednref3> Rudolf Adlung and Martin Molinuevo,
“Bilateralism in services trade: Is there fire behind the (BIT-)smoke?” WTO
Working Paper ERSD-2008-01, January 16, 2008, available at

[3] <#1517d29f5624a4b2__ednref4> *Id*.

[4] <#1517d29f5624a4b2__ednref5> UNCTAD, *World Investment Report 2014
UNCTAD, 2014), annex tables.

[5] <#1517d29f5624a4b2__ednref6> Rudolf Adlung, “Multilateral investment
disciplines: Don’t forget the GATS!,” * Columbia FDI Perspectives*, No.117,
March 17, 2014, available at

*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Robert Basedow, ‘Preferential investment
liberalization under bilateral investment treaties: How to ensure
compliance with WTO law?,’ Columbia FDI Perspectives, No. 162, December 7,
2015. Reprinted with permission from the Columbia Center on Sustainable
Investment ( <>).” A copy
should kindly be sent to the Columbia Center on Sustainable Investment at
[log in to unmask] <[log in to unmask]>. *

For further information, including information regarding submission to the
*Perspectives*, please contact: Columbia Center on Sustainable Investment,
Maree Newson, [log in to unmask]

*Most recent Columbia FDI Perspectives*

   - No. 161, Wenhua Shan, “The case for a multilateral or plurilateral
   framework on investment,” November 23, 2015.
   - No. 160, Mélida Hodgson, “The Trans-Pacific Partnership investment
   chapter sets a new worldwide standard,” November 9, 2015.
   - No. 159, Nicolás M. Perrone and Gustavo Rojas de Cerqueira César,
   “Brazil’s bilateral investment treaties: More than a new investment treaty
   model?” October 26, 2015.

*All previous **FDI Perspectives** are available at
<>**. *

*Other relevant CCSI news and announcements*

· *On January 29, 2016*, the CCSI/Global Economic Governance Programme at
Oxford University online forum on New Thinking on Investment
Treaties continues with a talk by Lauge Poulsen on “The Politics of
Investment Treaties in Developing Countries.” *For more information and for
the schedule of speakers, please visit our website **here
presentations will be posted here
Please subscribe to the channel and visit our website for updates*.

· The text of the Trans-Pacific Partnership (TPP) agreement, a mega trade
and investment treaty among Australia, Brunei Darussalam, Canada, Chile,
Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States,
and Vietnam, has recently been released. In this *Policy Paper*
CCSI’s Lise Johnson and Lisa Sachs respond to the USTR’s claims that the
“TPP upgrades and improves ISDS” and “closes loopholes and raises standards
higher than any past agreements.” Indeed, as they discuss, there are a
number of problems from previous trade agreements that have been carried
over into the TPP, and new provisions added to the TPP that do not appear
in other US FTAs and that raise additional concerns.

· CCSI is pleased to announce the return of its successful Executive
Training on Investment Arbitration for Government Officials in New York
City from *July 18-22, 2016*. Through an intensive week-long course,
government officials involved in managing investment treaty disputes or
negotiating investment treaties will increase their knowledge of crucial
procedural and substantive aspects of investment law. Sessions will be
taught by leading academics and practitioners and will be tailored to
uniquely address issues relevant to governments. For more information about
the program, including application materials, please visit our website
Applications will be accepted on a rolling basis.

Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
Ph: (212) 854-0689
Fax: (212) 854-7946

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