Investment Protection in the Americas: The Legal, Economic and Policy Implications of the Investment Chapter in the FTAA

Abstract:     
The following paper analyses possible legal and economic arguments supporting the inclusion of an investment chapter in the Free Trade Area of the Americas (FTAA), which is currently on the negotiating agenda. In particular, by looking at some of the former integration efforts and their contribution to investment protection, it draw lessons from these previous experiences, in an attempt to determine what could realistically be expected from the FTAA. Further, provisions in existing FTAs are compared with the FTAA proposal on investment, in order to determine if the latter will either congest or genuinely enhance investment protection.

From a legal perspective, the cross-comparison of existing agreements reveals that the FTAA investment chapter could have the positive effect of raising protection and harmonizing treatment in the region. However, the economic rationale for the FTAA fostering investments is not so strong. Existing FTAs with investment provisions have promoted trade rather than investments, as the empirical analysis reveals.

In the particular case of Andean countries, evidence on substitution is found, where sourcing countries prefer to trade rather than invest. This means that the FTAA is likely to promote trade rather than investments in that region, as the previous experiences with the Andean Community of Nations (CAN), NAFTA and the Group of 3 suggests. Therefore, despite the inclusion of an investment chapter in the FTAA and its positive effect of raising legal certainty, FDI is not expected to increase as a result of higher protection.

Therefore, if countries are to benefit from the spillovers of greater capital flows they must focus on economic policy design in the FTAA context. In the light of the unsatisfactory reforms in South America, the negotiation outcome of the investment chapter will greatly determine the extent to which members may define their policy and development strategies.

Number of Pages in PDF File: 100

Keywords: Regionalism, FTAA, trade, RTAs, FDI, Americas, NAFTA, Andean Community

JEL Classification: F13, F15, F21, F36, K33

working papers series