On 3 April 2020, the United National Conference on Trade and Development (UNCTAD) published Investment Policy Monitor (IPM), which indicates specific investment policy responses to the unprecedented coronavirus (COVID-19) pandemic. The IPM includes measures aimed at supporting investors as well as domestic economies so that the essential domestic infrastructure and industries could be protected, especially in the health sector (such as measures introduced in the European Commission).
Considering the unforeseeable impact of the pandemic on the future of investment policymaking, countries across the world are adopting different economic measures to address and limit the damages on their societies as well as economies. Global foreign direct investment (FDI) flows in 2020 are projected to fall by more than 30% compared to 2019 and this would be the worst hit of the past five years. In response to this accelerating decline, countries are assessing their policy trade-offs to escape any further dramatic and prolonged financial repercussions. The World Trade Organization (WTO) economists attribute the decline to the 2008-09 financial crisis and believe the current decline will likely exceed the trade slump brought by the 2008-09 crisis.
A major policy rethink at the international level could be an immediate effective solution to overcome both, health and economic crisis around the globe. As of now, India, China, and Peru have eased measures on inflows such as relaxed controls on foreign portfolio investment, cross-border borrowing, and short-term external liabilities respectively. Myanmar investment commission has accelerated approvals for investments in labour-intensive and infrastructure projects. Other countries have strengthened foreign investment screening mechanisms like Australia has lowered down the monetary screening threshold for foreign investments to zero and the Canadian government has announced enhanced scrutiny of FDIs in businesses and supply of goods and services to the entire nation. Looking ahead, international investment agreements (IIAs) can come into play concerning these policy responses taken by the governments and some of them could even be challenged by way of arbitration proceedings under IIAs. This article endeavours to analyse the impact of pandemic measures on international investment laws and how these are affecting trade and development globally. Further, the discussion on a sustainable approach towards economy and investment would illustrate the need for new policies in such changing times.
The unprecedented impact on trade and development
In the wake of controlling the spread of COVID-19, governments are imposing different restraints on businesses including new export or import restrictions, borders closures, shutting of non-essential facilities during lockdown periods, changed the working culture by confining employees to their home. All of these measures affect companies and investors badly.
In late march, the International Monetary Fund (IMF) announced that investors have already removed US$83 billion from evolving markets since the beginning of the pandemic. Adding to the steep drop in investment flows, international production networks have been severely impacted with global value chain (GVC) hub regions like China, Europe, and USA getting a direct hit. China being at the heart of such GVCs is the primary producer and largest customer of global commodities and industrial products. The country’s industrial production has fallen by 13.5%, with imports and exports decreasing by 4% and 17% respectively. The effect of these containment measures can easily be allied with retrenchment in international trade flows.
Weighed down by trade tensions and slowing economic growth, global trade was already slowing down in 2019 even before the COVID-19 existed and never returned to its erstwhile trend. With both demand and supply feeling coinciding shocks due to containment measures, there are four primary shocks in the global pandemic scenario as per the preliminary assessment done by the World Bank Group. The first shock is the underutilization of labour by 3% resulting in diminishing capital usage. The second shock is the 25% upsurge in the international trade costs of imports and exports causing significant damage to tradeable sectors. The third shock is the sharp drop in international tourism, hospitality, and recreation sector and the final shock is the demand reallocation from sectors involving close human proximity.
International Investment Law and COVID-19
Almost 3000 investment protection treaties echo investor protection clauses such as ‘prohibition of expropriation’ and ‘discrimination’, ‘fair and equitable treatment’. Generally, investor’s claims are based on discriminatory and/or arbitrary measures of the host state that includes regulatory policy change. It would be interesting to assess whether measures taken during the pandemic period would generate government liability for damages. These treaties act as a shield to investors and so far, governments have been maintaining a balance between investment protection and the right to regulate in IIAs. It is an alarming time for governments to analyse primarily two aspects. First, what should be the new trade policy, in addition to easing existing measures? Secondly, how to tackle the subjective interpretations of IIAs against regulatory changes to protect investors and investment. Host states are bound to protect and create a favourable investment climate. Measures to protect investment law and public health are addressed through new norms such as social distancing. Particularly, States have been taking intrusive public measures which are sometimes inconsistent with International Investment Law. For instance, government restrictions on some exports (especially medical equipment), order the production of particular goods (The United States used the Defense Production Act 1950 compelled General motors Company to produce medical ventilators), compensation to companies (including foreign investor’s companies).
Due to the unprecedented impact of the pandemic, states have been forced to shut some businesses or provide subsidy to specific companies or sectors, which could be argued under international non-discrimination standards as well as fair and equitable treatment (because state actors or non-state actors could not be treated differently). In response to such favourable or arbitrary decisions of States, foreign investors would seek compensation (in case of nationalization of their company by host State), financial assistance, or investment protection against the host State. This sudden change of circumstances could be addressed with the adoption of new strategic economic policies, consistent with international investment law.
Sustainability of the Economy and Investor protection
Governments across the globe are planning and taking short or mid-term measures to overcome and reduce economic damage resulting from the virus. Some measures aim to decrease liquidity pressure on the economy. For example, the United Kingdom has suspended energy bill payments during the crisis, introduced a furlough scheme to support businesses for job retention; France introduced rent forgiveness. Italy and Germany have allowed one-time payments to facilitate liquidity to affected professionals. Recently, States are considering the nationalization of companies in most affected sectors such as airlines. For instance, on 16 March 2020, Italy’s nationalization of lossmaking airline Alitalia. The long-term policies are still in making and expected to be stringent to bring back the economy as well as health back on track.
To conclude, States should address claims arising out of the BITs whilst designing and applying various economic measures in response to the COVID-19 pandemic. Even during this crisis period, investors are entitled to bring claims against States for breaches of the BITs. This seems to escalate the number of claims and eventually, based on the policy of respective BIT, either foreign investors win or the state. An investment policy is a backbone for trade and development, so, states should strive towards protecting and promoting investment. Therefore, both States and foreign investors must re-evaluate and analyse the potential interplay between rights and obligations prescribed in the BITs and COVID-19 measures.
Tushar Behl, Advocate, Research Associate at the Supreme Court of India. Nupur Priya, ACIArb, DAS Case Officer, Chartered Institute of Arbitrators, London (UK).