TPP Needs a Comprehensive Investment Chapter
By Scott Miller, Greg HicksJan 24, 2014
The United States is the world’s largest capital exporter with over $4 trillion dollars in capital stock invested abroad. U.S. outward foreign direct investment (FDI) is a cornerstone to our international relationships, and it powers our trading relationships. Outward investment is crucial to export performance, as 30 percent of U.S. exports are transfers between parent companies and their foreign affiliates. Meanwhile, U.S. foreign investors are important representatives of the United States to the world. Historically, the United States has understood the importance of outward foreign investment to the U.S. economy, image, and strength. Over the past 30 years, the United States has negotiated a network of bilateral investment agreements that offer U.S. investors strong protection from expropriation, equal treatment relative to host nation and foreign firms, and impartial dispute settlement mechanisms.
The investment chapter of the Trans-Pacific Partnership (TPP) is the next opportunity to advance investment policy consistent with U.S. interests. The United States’ trans-Pacific investment stock, at $950 billion in 2011, is a strong foundation on which to build. Comprehensive U.S. free trade agreement (FTA) investment chapters with TPP negotiating partners Chile, Peru, Mexico, Canada, and Singapore provide a solid foundation for the negotiation. Similarly, several TPP partners (Australia, Canada, Japan, New Zealand, and Singapore) already have high-standard investment agreements with other parties in the negotiations. These agreements contain similar important elements, especially in the areas of protection from expropriation, guarantees of equitable treatment, and access to investor-state arbitration if disputes arise. The TPP investment chapter would link together investor protection commitments with market access for goods and services and other disciplines, which would bolster growth for all parties.
TPP has many benefits. It would deepen integration with three of our top five trading partners, Canada, Mexico, and Japan. U.S. officials have the opportunity to update the now 20-year-old North American Free Trade Agreement (NAFTA) commitments and to negotiate, for the first time, preferential market access commitments with Japan. A high-quality investment chapter with Japan, which has one of the lowest inward FDI stocks (approximately $200 billion) among major economies, would drive substantial trade growth. With TPP, Malaysia and Vietnam also would open their markets to U.S. goods and investment at a moment when these large economies are experiencing sustained growth.
TPP is commercially attractive as is, but it promises to serve as the template for a Free Trade Area of the Asia Pacific (FTAAP). Locking in high-standard TPP investment commitments would establish the baseline requirements for potential new members, including China and Indonesia. China is currently negotiating an FTA with Australia and a bilateral investment treaty with the United States. To date, China has agreed in many of its bilateral investment agreements to commitments characteristic of high-standard agreements, including strong investor-state dispute settlement mechanisms.
Most investors in China see investor-state dispute settlement as an essential risk management tool. According to the State Department’s Investment Climate Statement, dispute settlement in China is unpredictable at best. Chinese courts are not independent, do not always enforce arbitral awards, and executive branch officials often ignore court decisions. China ranked 75 of 183 countries on Transparency International’s Corruption Perception Index. It’s no surprise that large capital exporters like Germany have insisted on investor-state arbitration provisions in investment treaties with China.
Trade follows foreign direct investment, especially in an era of global value chains. Expanding trans-Pacific trade and strengthening trans-Pacific relationships depend on establishing a trans-Pacific investment environment that protects and facilitates direct investment among member economies. As TPP negotiations move toward completion, the United States has the opportunity to ensure that the TPP investment chapter becomes the foundation for future economic growth and political stability in the Asia-Pacific region.
Scott Miller holds the Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Greg Hicks is a State Department fellow at CSIS.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
© 2014 by the Center for Strategic and International Studies. All rights reserved.
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