TPP: Investment Provisions
September 23, 2016
TPP: Investment Provisions
Background
Common Core Protections
The Trans-Pacific Partnership (TPP) is a proposed free
TPP maintains core investor protections reflecting U.S. law
trade agreement (FTA) among the United States and 11
and found in prior U.S. FTAs, such as obligations for
Asia-Pacific countries that would reduce and eliminate
governments to provide investors with non-discriminatory
tariff and non-tariff barriers on goods, services, and
treatment, a minimum standard of treatment, and
agriculture. TPP also would establish trade rules and
protections against uncompensated expropriation. Other
disciplines that expand on commitments at the World Trade
protections include a prohibition on imposing performance
Organization (WTO), such as on investment, and address
requirements as a condition of investment (e.g., local
new “21st century” issues, such as digital trade and state-
content requirements) and a requirement for the free
owned enterprises.
movement of capital. These obligations are subject to
certain general exceptions, such as for prudential and
In 2015, the United States was the largest source of and
essential security interests, as well as country-specific
destination for foreign direct investment (FDI). TPP covers
exceptions. TPP also establishes procedures for investors to
about 20% of U.S. FDI abroad, and includes major U.S.
take host governments to binding arbitration through
investment partners, such as Japan and Canada. The United
investor-state dispute settlement (ISDS) to resolve disputes
States has FTAs in force with six TPP countries, all with
over alleged violations by host governments of their
investment obligations (Fig. 1). Still, concerns remain over
investment obligations.
investment barriers in the TPP region, such as sectoral
restrictions, discriminatory treatment, and local content
Selected New Features
requirements.
Clarification of minimum standard of treatment (MST).
Figure 1. U.S. FTAs with Proposed TPP Partners
TPP requires parties to provide MST in accordance with
applicable customary international law (e.g., due process).
New in TPP is clarification that a party’s action or inaction
that may frustrate an investor’s expectations is not, on its
own, a breach of the MST, even if loss or damage to the
investment follows. Industry groups argue that the change
narrows investor protections too much, while civil society
groups argue that the scope of protection remains too broad.
Reaffirmation of governments’ right to regulate. TPP
carries over language found in prior U.S. FTAs that states,
except in rare circumstances, non-discriminatory regulatory
action by a government does not qualify as indirect
expropriation. In addition, TPP more explicitly states that
nothing in the Investment Chapter shall be construed to
prevent parties from taking action otherwise consistent with
the chapter to pursue environmental, health, or other
regulatory objectives. Such provisions target ongoing
concerns in U.S. investment policy raised by certain
Source: CRS.
stakeholders, but continue to elicit debate such as about
Investment Provisions and Key Debates
how to balance investor protections with governments’
right to regulate, particularly in the context of investor-state
TPP’s investment chapter defines “investment” broadly as
arbitration.
assets that investors control directly or indirectly. Examples
Other new features. TPP contains new prohibitions on
of forms that may qualify as an investment, include
performance requirements, including banning requirements
enterprises, stocks, debt instruments, intellectual property,
related to the purchase, use, or preferential treatment of a
licenses, authorizations, and permits. The TPP investment
country’s technology. TPP is also the first U.S. FTA to
chapter aims to promote investment and protect investors,
make explicit that the investment obligations apply to state-
while balancing these goals with other policy objectives.
owned enterprises (SOEs). While such issues are a concern
Investment is a cross-cutting issue, and other chapters in
in the TPP region, the provisions also could be relevant to
TPP also address investment. TPP investment rules largely
mirror the 2012 U.S. model bilateral investment treaty
any future multilateral rules-setting.
(BIT), but also contain certain innovations.
https://crsreports.congress.gov
TPP: Investment Provisions
Revisions to Investor-State Dispute Settlement
for investments in sectors such as communications, social
services, and transportation. Malaysia’s NCMs are among
TPP ISDS provisions include new rules for dismissing
the most controversial for U.S. firms. U.S. industry groups
frivolous suits, third-party submissions, and arbitrator
have criticized Malaysia’s “best interest test” for financial
qualifications and a code of conduct. These provisions aim
services investments as non-transparent and broadly
to address concerns about transparency, public
defined. In general, some observers express concern that the
participation, and fairness of ISDS proceedings.
high number of exceptions undercuts gains in investor
Separately, the TPP Financial Services Chapter includes
protections from TPP, while others assert that such
provisions that allow for greater use of ISDS to resolve
exceptions were necessary to conclude the agreement.
certain disputes concerning financial services investment,
notably alleged violations of the MST. U.S. financial
Box 1. Record on ISDS
services firms support this expansion, but would prefer that
As FDI flows globally have grown substantially worldwide, known ISDS
it also include, for example, specific recourse for
cases have grown, with 739 ISDS claims during 1987-2016 (to date),
discriminatory treatment. In contrast, civil society groups
including 471 that have been concluded.
express concern that this provision could allow investors to
challenge U.S. financial and other regulations.
37% decided in favor of state (on merits/no jurisdiction);
27% decided in favor of investor; 25% settled;
Supporters argue that ISDS is a reciprocal right protecting
10% discontinued or breach found but no damages; 2%
U.S. investors overseas, ISDS gives foreign investors in the
decided in favor of neither party.
United States no additional substantive rights relative to
For ISDS cases that reached decisions on the merits, 60%
U.S. law as investment obligations mirror U.S. law, and no
were in favor of investors and 40% in favor of state.
ISDS case has ever been decided against the United States.
The United States has never lost a case as the respondent state. U.S.
Critics, in contrast, assert that investors should not have
investors are the leading users of ISDS globally. TPP parties are
additional procedural rights to challenge governments
prominent in the U.S. experience with ISDS.
through a venue outside of the country’s courts, that the
Individual cases initiated against United States: 16.
scope of covered protections is too broad, that transparency
10 decisions favorable to United States; 0 decisions
and fairness issues remain, and that ISDS in TPP may open
unfavorable; 3 settled; 1 discontinued; 2 pending.
the United States to more liability as inward investment
Number of cases initiated by U.S. investors: 145.
potentially increases. While critics argue that the mere
threat of ISDS can lead to a regulatory “chilling effect,”
Home countries of claimants in cases initiated against
United States: Canada (15); Mexico (1).
supporters argue that ISDS decisions cannot require a
country to change its laws or regulations, and that TPP
TPP respondents in cases initiated by U.S. investors: Canada
includes safeguards for regulatory interests.
(25); Mexico (15); Peru (2); Vietnam (1).
Recent developments: 2015 decision in favor of Bilcon (U.S.
Tobacco carve-out. A flashpoint in the ISDS debate is its
company) against Canada for denial of mining quarry permit;
relationship to tobacco control measures. The exceptions to
2016 TransCanada’s complaint against United States for denial of
investment would allow countries to exclude tobacco
a permit for Keystone XL Pipeline border-crossing facilities.
control measures from ISDS. An ISDS case brought by
Source: United Nations Conference on Trade and
Philip Morris Asia against Australia under a non-U.S. BIT
Development (UNCTAD); U.S. Department of State.
for its plain-packaging requirement for tobacco products,
which the company claims expropriated its trademarks,
highlighted these concerns. In 2015, the case was dismissed
Looking Forward
for lack of jurisdiction, with no decision on the merits.
If TPP enters into force, its impact on investment could
Some Members of Congress and industry groups oppose
extend beyond the TPP to influence U.S. investment rules
exempting tobacco control measures from ISDS as
with other countries, such as ongoing BIT negotiations with
discriminatory treatment of a legal industry, unnecessary
China and India or U.S FTA negotiations with the European
due to other safeguards in the Investment Chapter, and a
Union, as well multilaterally in the WTO. However,
“slippery slope” for other sectors to be similarly targeted in
questions remain over whether Congress will consider
the future. Other Members of Congress and civil society
implementing legislation for TPP. For more information,
groups argue the carve-out addresses a key public health
see CRS In Focus IF10052, U.S. International Investment
issue and targeting tobacco is rational because, as a product,
Agreements (IIAs), by Martin A. Weiss and Shayerah Ilias
it is uniquely subject to a United Nations Framework
Akhtar; and CRS Report R44015, International Investment
Convention calling for measures such as those undertaken
Agreements (IIAs): Frequently Asked Questions,
by Australia.
coordinated by Martin A. Weiss.
Non-Conforming Measures (NCMs)
Shayerah Ilias Akhtar, Specialist in International Trade
TPP investment rules are on a “negative list” basis. In other
and Finance
words, TPP countries must take on the obligations in all
Ian F. Fergusson, Specialist in International Trade and
sectors unless they specifically take an exception, known as
Finance
an NCM listed in TPP annexes. The United States, for
IF10476
instance, takes exception to non-discrimination obligations
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TPP: Investment Provisions
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