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The Return of Investment Policy -- The U.S. Is Back in the Game

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Foreign investment policy hasn't been the main focus of the U.S. government in recent years. However, this may begin to change and industry leaders should not stay behind.

Inconsistent and fragmented U.S. government decisions have made it difficult for foreign investors in the U.S. to make critical investment decisions. The primary focus on trade policies, the sensitivity of foreign investment discussions in the political context, and the lack of leadership have been part of the reason for said priorities. Yet, recent developments indicate a potential change may take place.

The U.S government announced couple of days ago that a three-year review process of U.S. bilateral investment treaty (BIT) model has ended. An investment treaty is a bilateral, regional, or a multilateral instrument aim at promoting and protecting foreign direct investment, and helping U.S. corporations to compete abroad. The U.S. government has been using a 2004 model, which has become less relevant in light of recent macroeconomic developments, such as the rise of state-owned entities and sovereign funds activity in the U.S., and the political pressure to include labor and environmental standards that would be applied to foreign corporations operating in the U.S.

An important element, which made a new draft agreement difficult to achieve, is the policy towards incoming investments from China. Since the issues of investment policies and the alleged currency manipulation are linked to each other, the lack of clarity with regards to Chinese foreign exchange policy has an impact on foreign investment policies in general.

The new draft model, which clarifies some of the issues, will trigger a new wave of negotiations and agreements that eventually would protect U.S. investment in unstable economies and will provide foreign investors in the U.S. with better investment environment.

A summary of the draft model and its main developments are not within the scope of this piece, but several takeaway points should be considered. Three leading themes seem to shape the new approach. First, U.S. corporations would like a better level playing field in foreign markets when these compete against local champions. Thus, the new model specifically refers to "State Enterprises" and their obligations in international economic relations. Second, there are continuous efforts to improve the effective mechanism for enforcing the international obligations of the U.S. economic partners. The new model includes a more transparent and inclusive process that engages the public. Finally, it includes stronger labor and environmental protections that reflect the administration's strategy to link economic performance to democratic and 'rule of law' values, while keeping the ability to regulate for public interests.

The consequences could be dramatic. Business people and politicians alike should follow and take note. First, the draft model that just got published can revive the negotiations on pre-existing drafts, such as U.S.-China bilateral investment treaty. This treaty is a unique opportunity for policy makers on both sides to provide clarity on several key issues of concern, such as investment by state-own entities, Chinese sovereign funds, national treatment applying to U.S. and Chinese companies, and many others. U.S. politicians, business groups and the Office of the Trade Representative already hinted that the Strategic and Economic Dialogue meeting in Beijing on May 3 and 4 could be a potential forum for re-launching of such an engagement.

Second, the new U.S. policy can trigger new negotiations on economic agreements with governments, with which the U.S. administration wants to further develop economic and diplomatic relations. It was only two weeks ago when the Secretary of State, Hillary Clinton, announced in Brazil the need to conclude a bilateral investment treaty and a double taxation treaty, which is a reflection of the $75 billion of trade between the nations and $15.5 billion Brazilian investment in the U.S. last year. Clearly, the challenges arise of these economic ties can be substantial. Secretary Clinton herself understands well that promoting foreign investment policy is necessary in order to capitalize on the true potential of the bilateral relations. In her words: "The opportunity and potential for greater investment, trade, growth and jobs is only now being tapped."

Moreover, American CEOs watch carefully the recurring trend of resource nationalism. The most recent example was the nationalization of Repsol's ownership in YPF in order to turn it to a state-owned energy company to better manage scarce energy resources. Due to the decline of the diplomatic protection tool in global affairs, governments are much more limited in their ability to support and protect investors in their operations abroad. While governments do express their concern about anti-foreign sentiments regarding economic interests in foreign countries, the focus has shifted to alternative solutions, such as international arbitration. Thus, foreign investment policies and bilateral investment treaties can and should be part of the Western economic agenda to protect investments against a new wave of resource nationalism.

The jury is still out whether these new developments are a real sign that the U.S. government is taking investment policies seriously. Recent public announcements and draft agreements are meaningless if the U.S. government will not push forward and negotiate tailored economic arrangements with its economic partners. It is also important to understand that most economic partners defer substantially on many of these policies, including national support to state enterprises and greater flexibility when it comes to labor and environmental obligations. Final agreements can be far more neutral than most American business people would like to see. But, no doubt, the U.S. administration would like to move forward. One step at a time, even if it's a slow-moving progress in the right direction -- it's worth staying tuned.