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Policy Proposals  Trade, Investiment, EPA/FTA Calling for Accelerated Conclusion of Investment Agreements -- Toward Establishment of 21st-Century International Investment Rules --

(Provisional Translation)

December 15, 2015
Keidanren (Japan Business Federation)

1. Introduction

As globalization progresses, and in particular, cross-border investments grow, international investments play an increasingly important role in the growth of the Japanese economy.

Since early on, Keidanren has strongly called for governments to establish international investment rules and protect, liberalize, and facilitate cross-border investments through the establishment of such rules mainly by concluding bilateral and regional Economic Partnership Agreements (EPAs) as well as Bilateral Investment Treaties (BITs)#1. In particular, in April 2008, it offered its comprehensive policy proposal about how to establish the legal framework for Japan's foreign investments and take other related measures and has since promoted to achieve its goals. In this proposal, taking into consideration the progress in the initiatives Japan has carried out since 2008 and the changes in the global environment that surrounds international investments, Keidanren puts forward its opinions again about how to proceed with BITs and EPAs that include investment chapters (hereinafter collectively referred to as "investment agreements.") and indicates specific countries and territories Japan should give priority to approaching.

2. Current Situation and Challenges

(1) Economic Significance of International Investments and the Necessity of Legal Framework to Govern Investment

As international investments grow, the stock of inward foreign direct investments as a percentage of GDP expanded from 9.8% in 1990 to 33.7% in 2014, and as exemplified by this and other developments, the importance of international investments in the world economy is increasing rapidly. In this sense, international investments are extremely important to the growth of and employment in the world economy, including recipient countries of inward foreign investment#2. Cross-border investment interchange not only provides businesses in investor countries with greater business opportunities but also offer investment recipient countries opportunities to create domestic employment and introduce new managerial resources such as foreign capital, new business models, and innovative technology. Therefore, establishing appropriate legal framework to govern foreign investments not only contributes to the interests of investor countries and foreign investors but also is indispensable to investment recipient countries.

BITs came to be concluded in order to protect foreign investments as a means of providing such legal framework, which include recipient countries' promise not to treat foreign investors, and expropriate investment property, in a discriminatory or arbitrary manner. The number of BITs thus concluded increased dramatically in the 1990s, and by the end of 2014, it had reached 3,271#3. In recent years, in addition to the protection of investments, such BITs and other investment agreements have provided national treatment to the establishment of investments, prohibition of performance requirement, and other commitment of investment liberalization#4.

(2) Japan's Initiatives

In recent years, Japan has seen certain progress in concluding investment agreements, including the conclusion of the Trans-Pacific Partnership (TPP) Agreement#5. In 2013, in its Japan Revitalization Strategy, the Japanese government formulated policy to promote the conclusion of investment agreements that meet the needs of the Japanese industry#6.

With respect to investments in infrastructure systems in which Japan can make the most of its strength among foreign investments, Keidanren has put together a set of proposals entitled "Toward Strategic Overseas Development of Infrastructure Systems" since 2013, and in November of this year, too, it published its new proposals based on questionnaire surveys ("2015 Infrastructure Proposals"). As Prime Minister Shinzo Abe advocated "Partnership for Quality Infrastructure" in May 2015, the Japanese government views overseas infrastructure development as a major pillar of its growth strategy and is promoting such development. Investment agreements play a major role in carrying out infrastructure development projects, and examples of their benefits include eliminating excessive local content requirement, providing mechanism for creating a favorable business environment, and Investor-State Dispute Settlement (ISDS) that can be used when investors are faced with expropriation, unilateral change or revocation of concession agreements.

However, investment agreements have not been concluded as quickly as economic circles expected. The above-mentioned 2008 Proposals cited eleven countries as ones in which the necessity of protection and liberalization of foreign investments was high, but except Colombia, none of the countries have effectuated an investment agreement with Japan so far#7. Furthermore, Japan is still far left behind other countries in terms of the number of investment agreements and FTAs and EPAs, which include the investment chapter#8.

In order to provide important countries and territories to Japan with a high-quality legal framework for investments from Japan, it is urgently needed to accelerate conclusion of investment agreements.

3. Basic Approach

(1) Three Categories

From the viewpoints mentioned above, Keidanren requests the Japanese government to establish legal framework to govern foreign investment according to the three categories and basic approach described below.

  1. (a) Early conclusion and entry into force of investment agreements, which are currently being negotiated
  2. (b) Immediate launch of negotiations with important countries and territories that have not yet concluded investment agreements with Japan
  3. (c) Continuous review of existing investment agreements, and launch of negotiations for countries that are more strongly required to raise the level of investment protection and liberalization

(2) Content That Should Be Included in Investment Agreements

Investment agreements should include the clause of Investor-State Dispute Settlement (ISDS), Fair and Equitable Treatment, the liberalization of investments or rules on the restriction of foreign investments (such as national or most-favored-nation treatment to the establishment of investments or prohibition of performance requirement), facilitation of investment activities (ensuring transparency mainly through making laws and regulations publically available and public comment procedures), freedom of transfers(including royalties)#9, freedom of liquidation and withdrawal, establishment of favorable business environments#10, and the umbrella clause#11, which covers contracts reasonably related to investments#12.

Together with these provisions, in order to efficiently and continuously solve the problems with which Japanese businesses are faced when making investments smoothly on a global scale, the government should establish and strengthen a framework for public-private consultations and dialogues with partner countries as a means of complementing investment agreements.

(3) Matters to Note

  1. (a) Securing the Appropriate Scope of Protection
    Against a background of growing concern#13 about investment agreements in recent years, governments' moves to review the international investment rules are also spreading#14.

    Under these circumstances, meanwhile, there are some improvements to the content of investment agreements. Such reforms would be highly significant if they lead to stronger protection or promotion of liberalization of investments, such as clarifying the existing concept of Fair and Equitable Treatment or expropriation in the provisions of agreements based on past arbitration cases, making ISDS procedures transparent, or clearly defining or expanding the scope of investments in ways that meet actual business needs including new types of investments.

    On the other hand, a matter of concern is the tendency that the scope of investments protected is going to be or proposed to be limited#15. It is proposed, for example, to include exceptions to protected investment in order to safeguard governments' right to regulate#16. However, limiting or making exceptions to protected investment may result in justifying arbitrary or unjustifiable discrimination against foreign investment or investors and allowing hidden restrictions on foreign investments. In addition, excessive limitation of protections could hinder foreign investments. In order to ensure smooth business activities, investment agreements should provide clear rules for and broad scope of protected investments. In addition, carving out specific sectors from the treaty's scope of application should not be adopted from the viewpoint of offering fair and not arbitrary protection for foreign investments.

    Full attention needs to be paid so that the original significance of investment agreements—protecting international investments appropriately and promoting their liberalization—is not impaired.

  2. (b) Investor-State Dispute Settlement
    A look at the global environment that surrounds Investment Agreements indicates that there are some countries that are wary of the ISDS clause in particular#17. The reason for this is that an increasing number of investors use ISDS#18, and some point out that the institution by foreign investors of actions against investment recipient countries and the payment of awards to cover damages to foreign investors impinges the right to regulate of sovereign states.

    However, some of these comments which pay attention only to the purpose of regulations by states#19 and the amounts of awards rendered are one-sided or emotional critics. Behind these comments is a lack of understanding of the way ISDS works. Meanwhile, recipient countries benefit from foreign investments in terms of economic growth and employment while investors suffer damage from the acts of states, and these are not fully recognized, either.

    Only if states violate any of the duties based on investment agreements#20 and as a result damage is caused to foreign investors' investment property, ISDS entitles the investors to be compensated for the damage caused. In addition, arbitral decisions under ISDS do not require countries to withdraw or change their measures or regulations. Past cases of arbitration provide that foreign investors are not compensated for the damage caused when states adopt bona fide regulations in a non-discriminatory manner for a public purpose which is enacted in accordance with due process.#21 Therefore, the claim that ISDS infringes states' right to regulate lacks reasonable grounds.

    Rather, establishing legal framework to govern foreign investment, including ISDS, to ensure non-discriminatory and non-arbitrary protection of foreign investments plays an important role in facilitating foreign investments and improving the predictability of investment business, and this mechanism contributes to economic growth and employment expansion in investment recipient countries.

  3. (c) Investment Agreements and Corporate Social Responsibility
    In recent years, there have been examples of investment agreements which included a clause of corporate social responsibility (responsible investment). The purpose of treaties related to foreign investment is, however, to stipulate the duties imposed on a contracting state in order to prevent its government from exercising state's power arbitrarily over foreign investors operating outside the jurisdiction of their country of nationality. On the other hand, as for corporate responsibility and duty, as long as they invest under the jurisdiction of the recipient country, foreign investors are naturally subjected to the exercise of authority by the government of investment recipient country and required to comply with the laws and regulations of that country. For this reason, it is not necessary to include provisions of corporate social responsibility in investment agreements, and if such provisions are included, they may rather cause businesses to shrink from investments in the territories of that country. Therefore, investment agreements should limit the scope of duties to those imposed on the governments.

4. Examples of Countries and Territories

In line with three Categories shown in the basic approach, the following section indicates countries and territories that Japan needs investment agreements. The underlined countries denote those positioned as priority countries in the 2015 Infrastructure Proposals.

(1) Early Conclusion and Entry into Force of Investment Agreements, Which Are Currently Being Negotiated

[Bilateral Investment Agreements]
Angola (Largely agreed, further negotiations are suspended), Algeria, Qatar, United Arab Emirates, Kenya, Ghana, Morocco, Tanzania, Israel, Iran (Largely agreed), Saudi Arabia (signed in April 2013), and Oman (signed in June 2015)
(* Listed in the order in which negotiations began or agreements were signed)
[EPAs/FTAs That Include Investment Chapters]
Bahrain (negotiations are postponed), GCC, Japan-China-Korea FTA, RCEP (Regional Comprehensive Economic Partnership), Japan-EU EPA, TPP Agreement (Concluded), and Japan-Turkey EPA
(* Listed in the order in which negotiations began)

With respect to the agreements as shown above, Keidanren requests that the Japanese government should reach and effectuate a high-quality agreement early.

The TPP Agreement should be signed and effectuated early. Following the conclusion of the TPP, the government should realize RCEP and a Japan-China-Korea FTA early in order to establish a free economic area that covers the entire Asia Pacific region. In particular, Keidanren requests the government to accelerate negotiations to realize an FTA among Japan, China, and South Korea, an area that has no EPA or FTA although the three countries combined account for 70% of ASEAN+6's GDP#22.

In particular, it is important to include a high-level investment chapter in the Japan-China-Korea FTA, and as a liberalization commitment method, a negative-list approach should be adopted following the agreement which China has already concluded or is currently negotiating with other countries (for example, the China-Australia FTA and the U.S.-China BIT).

In the negotiations for a Japan-EU EPA, too, the government should include a high-level investment chapter and adopt a negative-list approach. EU (1) is a major region targeted for investment, representing approximately 22% of the stock of Japan's direct investments (as of the end of 2014), (2) supports infrastructure, innovation and SME-related projects in accordance with the three-year €315 billion new investment plan unveiled in November 2014 and is concentrating on promoting further market unification, and (3) is negotiating an FTA and an investment agreement with the United States and China, respectively, and considering these points, it is needed to conclude an EPA with EU early.

(2) Launch of New Negotiations

Brazil, South Africa, Senegal, Cuba, Nigeria, Bolivia, Ecuador, Argentina, and Panama

The government should enter new negotiations with the countries listed above and Japan immediately, as there is no EPA with an investment chapter nor investment agreement with Japan. In doing so with countries that are strategically important to Japan—that is, Brazil and other countries with which Japan has close trade and investment relations, it should not just to conclude a bilateral investment agreement but also explore possibilities of negotiating an EPA, which contributes to overall improvement of trade and investment relations between the two countries#23. At least, it is necessary to provide the level playing field for Japanese investors so that the investments from Japan are not being put at a competitive disadvantage vis-a-vis the investment from third countries due to the investment agreements between that third countries and the investment recipient countries.

The Japan-Brazil Joint Committee on the Promotion of Trade, Investment, and Industrial Cooperation has been established between Japan and Brazil which is not based on an investment agreement, but it is desirable that a legal framework should be established. In recent years, Brazil has moved to conclude agreements for investment protection with several countries, but a comprehensive agreement, including clauses that cover investment liberalization, establishment of favorable business environments, ISDS, and other areas in which the needs of Japanese businesses operating in the country are high, is hoped for.

In South America, including Ecuador, Bolivia, and Argentina, there is concern about moves to nationalize foreign-affiliated businesses mainly in the energy sector.

(3) Existing Agreements Should Be Revised or Negotiations to Conclude EPAs Started

Egypt (Investment Protection Agreement, 1977), Sri Lanka (Investment Protection Agreement, 1982), Hong Kong (Investment Protection Agreement, 1997), Pakistan (Investment Protection Agreement, 1998), Bangladesh (Investment Protection Agreement, 1999), Russia (Investment Protection Agreement,1998), the Philippines (EPA, 2006), Thailand (EPA, 2007), India (EPA, 2011), and Iraq (Investment Protection Agreement, 2012)
(* Listed in the order in which the agreements signed)

Listed above are examples of countries whose existing agreements with Japan would need negotiations for revision. In particular, the goals that should be achieved in the process of revision include the liberalization of market access by foreign investment, facilitating of investment activities, and the inclusion of the ISDS clause.

The 2015 Infrastructure Proposals view Bangladesh in particular as one of the priority countries in Asia, the world economy's engine for growth, and the necessity of revising the traditional investment protection agreement between Japan and Bangladesh which took effect in 1999 is high.

The government should also consider concluding an EPA with other countries and territories taking into account factors such as their trade and investment relations with Japan, changes in the business environment in those countries, and the year when the existing agreements were signed.

The Japan-Philippines EPA does not include the ISDS clause#24. The Japan-Thailand EPA has a low level of investment liberalization as, for example, it remains at the same level as the Agreement on Trade-Related Investment Measures (TRIMs) agreed upon by all members of the World Trade Organization (WTO)#25.

5. Conclusion

As the significance of international investments grows in the world economy, international investment rules are extremely important as an institutional framework that underpins the development of the world economy. From this perspective, the Japanese government should take leadership in establishing international investment rules to answer the needs of the 21st century which will step up protection, liberalization and facilitation of international investments, including the proposals mentioned earlier. Given the present situation in which investment discipline and the court of arbitration vary from one agreement to another, it is extremely important to proceed with negotiations with each country in anticipation of how international investment rules should be in the future. The government should work to establish multilateral international investment rules, including pushing initiatives at the WTO, which provides the basis for a multilateral free trade system#26. It is also necessary to push negotiations for the Trade in Services Agreement (TiSA)#27 because it covers the liberalization of services that are provided through commercial presence in the territory of foreign countries and also because such agreements could complement investment agreements.

Keidanren requests the Japanese government to swiftly establish strategy, and step up its efforts, to realize the proposals mentioned above.

It is important, on the other hand, for businesses to actively request investment recipient countries to improve and take corrective actions for the investment environment by making the most of the various provisions of investment agreements, including ISDS and frameworks to develop favorable business environments.


  1. In its July 16, 2002 policy paper "Toward the Creation of International Investment Rules and Improvement of the Japanese Investment Environment," Keidanren proposed to strategically utilize multi-faceted channels in the global investment environment, including multilateral (WTO), plurilateral (such as OECD), regional (such as ASEAN+3), and bilateral (China, South Korea, ASEAN, NAFTA countries, etc.) agreements as well as the investment chapter of EPAs, seeking effective use of diverse tools. In addition, as for the investment chapter of EPA, Keidanren called for establishment of high-level investment rules such as granting in principle national treatment or most-favored-nation treatment to the pre-establishment of investments and prohibiting performance requirement in principle such as to employ locals in its proposals, including "Toward Broader and Deeper Economic Partnership Agreements" (October 17, 2006). In October 2007, Keidanren issued policy proposals "A Call for the Development and Promotion of Proactive External Economic Strategies" as a comprehensive set of guidelines for Japan's global, external economic strategy, and in these proposals, it pointed out that as part of its efforts to establish a favorable global business environment, the government should promote conclusion of not only EPAs but also plurilateral agreements such as investment agreements, tax treaties, and social security agreements according to Japan's relationships with partner countries and territories.
  2. World Investment Report 2015
  3. This includes 2,926 BITs and 345 other investment agreements such as FTAs with investment chapters (World Investment Report 2015).
  4. As of the end of 2014, 228 of the 3,271 investment agreements included pre-establishment commitment clauses (World Investment Report 2015).
  5. In its April 2008 policy proposals "On the Improvement of Japan's Global Investment Environment: Toward the Creation of a Legal Framework for Japanese Foreign Investment" (2008 Proposals), Keidanren cited 25 countries as countries with which Japan should negotiate an investment agreement. After the proposal was issued, five of them signed or effectuated investment agreements or Economic Partnership Agreements (EPAs) that include investment chapters, with Japan.
  6. Referring to "Promoting conclusion and reform of investment agreements and tax treaties" the Japan Revitalization Strategy (June 14, 2013) states that "The government will accelerate the conclusion of investment agreements based on our industrial needs and conclusion status of economic partnership agreement including its Investment Chapter from the standpoint of promoting overseas development of companies and securing a stable supply of mineral and energy resources. Therefore, it will develop and promote guidelines toward promoting and making effective use of the conclusion of investment agreements."
  7. Among the eleven countries mentioned in its 2008 Proposals that there was a strong need for investment protection and liberalization, a BIT with Colombia entered into force in September 2015.Other than that, a BIT with the United Arab Emirates is under negotiation. For Poland, Czech Republic, Hungary, Slovakia, and Romania, negotiations for a Japan-EU EPA are under way. No negotiations of investment agreements are held with Brazil, South Africa, Argentine, and Venezuela.
  8. As of October 2015, the number of BITs and EPAs/FTAs include the investment chapter which had taken effect was 35 for Japan, 186 for Germany, 148 for France, 147 for the United Kingdom, 125 for China, 93 for South Korea, and 89 for the United States. (Source: UNCTAD International Investment Agreements Navigator for countries other than Japan)
  9. The Japan-Myanmar Investment Agreement, Japan-Mozambique Investment Agreement, Trans-Pacific Partnership Agreement, for example, clearly prohibit a contracting party from imposing restrictions over a rate or amount of royalty under a licence contract below a certain level, and contain freedom of transfer clause under which royalties are explicitly included. These provisions are highly valued as they reflect the needs and requests of economic circles in Japan, and it is important to include similar provisions in future investment agreements.
  10. For example, BITs such as the Japan and Mozambique Investment Agreement include a clause of discussions for encouraging favorable business environment for investors.
  11. The umbrella clause stipulates the duty of a signatory to observe any contractual obligations it may have entered into with investors of others.
  12. For example, the Japan-South Korea Investment Agreement and the Japan-Vietnam Investment Agreement serve as a reference. The scope of investment contracts protected is limited under the TPP agreement (provisional text).
  13. Brazil, for example, has not ratified any of the 14 investment agreements its government signed. Indonesia notified the Netherlands and other countries of its intention to terminate its investment agreements with them. According to the World Investment Report 2015, the reason for unease about investment agreements is that countries have come to aware the fact that like other treaties, investment agreements bind their signatories within the consent they gave and ISDS makes them legally enforceable. It also pointed out that the financial crisis of 2008 and a growing awareness of governments about sustainable development have prompted them to recognize the necessity of maintaining their regulatory framework for investment.
  14. These moves are not limited to clarifying rules within the existing framework as typified by the reaffirmation of governments' right to regulate for public purposes. Ideas have been put forward for new mechanisms such as establishing specific investment courts system that can hear appeals. For EU's approach, for example, refer to European Union's Proposal for Investment Protection and Resolution of Investment Disputes, entitled "Transatlantic Trade and Investment Partnership-TRADE IN SERVICES, INVESTMENT AND E-COMMERCE" (November 2015). UNCTAD proposes options for reform as part of what it calls a "design for future international investment regimes" in its World Investment Report 2015.
  15. Examples include the exclusion of ISDS, exclusion of ISDS from particular areas, omitting the umbrella clause.
  16. The World Investment Report 2015 presents examples of a wide range of options to reduce the scope of investment protection, such as circumscribing or eliminating Fair and Equitable Treatment, omitting ISDS mechanism, or circumscribing the scope of protected investors to initiate proceedings of ISDS.
  17. The Australia-United States Free Trade Agreement and the Japan-Australia Economic Partnership Agreement do not include ISDS mechanism. Bolivia withdrew from the International Centre for Settlement of Investment Disputes (ICSID) in 2007, and Ecuador denounced the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) in 2010. Ecuador also terminated nine BITs in 2008, and its Constitutional Court ruled that the ISDS clause of four BITs was unconstitutional.
  18. Since 2008, the number of cases for international investment arbitration under international investment agreements has continued to rise. In 2013, the number was 59, a record high, and by the end of 2014, the cumulative number had reached 608. (Source: UNCTAD, May 2015, Investor-State Dispute Settlement: Review of Developments in 2014)
  19. Examples include protection of environment and health.
  20. Examples of duties include prohibiting discrimination against foreign investors and investment property, providing due-process, and prohibiting particular performance requirements (such as to achieve given level or percentage of local content), ensuring adequate compensation for expropriation and assuring the freedom of transfer.
  21. Methanex vs. United States (2005) and Saluka Investments B.V. vs. The Czech Republic (2006)
  22. Refer to Keidanren's proposals "Requesting Early Realization of a high-quality Japan-China-Korea FTA and Regional Comprehensive Economic Partnership in East Asia" (May 2013)
  23. Keidanren worked with the Brazilian National Confederation of Industry to put together a joint report, Brazil-Japan: Roadmap for an Economic Partnership Agreement (September 1, 2015), and has argued for the necessity of a comprehensive EPA.
    (http://www.keidanren.or.jp/en/policy/2015/074.pdf)
  24. For example, the BIT between Germany and the Philippines includes the ISDS clause, and the ICSID arbitrates disputes under this clause. (Fraport AG Frankfurt Airport Services Worldwide vs. the Republic of the Philippines, ICSID Case No. ARB/03/25, August 16, 2007)
  25. The WTO's Agreement on TRIMs expressly prohibits trade-related investment measures that violate the principle of national treatment and the general elimination of quantitative restrictions (demands for local content, trade balancing requirements, and foreign exchange and export restrictions (domestic sales requirement)).
  26. In its policy proposals "Call to Rebuild the WTO Multilateral Free Trade and Investment System" (May 19, 2015), referring to WTO and the Doha Round, Keidanren offered its opinion that "the WTO members should resolve remaining issues swiftly including "Non-Agricultural market Access (NAMA)," "Service," and Antidumping" ... and also the Doha Round should be brought to a close. There will then be a need to start examining ways of using the WTO framework to converge various agreements, including mega-FTAs and field-specific plurilateral agreements, into multilateral agreements. (omitted) For post-Doha negotiations, it will be essential to rethink the consensus approach and the single undertaking, which are the bottlenecks in negotiations. In order to facilitate negotiations, there is a need to utilize plurilateral frameworks and establish rules in fields not covered by existing WTO agreements or Doha Round talks (such as ICT, investment, competition policy, and the environment)."
  27. The Trade in Services Agreement is negotiated by like-minded WTO member countries and territories to develop a new agreement for further liberalization of trade in services. Against a background of an impasse in the Doha Round of WTO negotiations, which began in 2001, it is discussed by those countries and territories as a separate initiative from the Doha Round. Currently 23 countries and territories participate in the TiSA negotiation: Japan, the United States, EU, Canada, Australia, South Korea, Hong Kong, Taiwan, Pakistan, New Zealand, Israel, Turkey, Mexico, Chile, Colombia, Peru, Costa Rica, Panama, Paraguay, Norway, Switzerland, Iceland, and Liechtenstein.

Trade, Investiment, EPA/FTA