This study discusses pros and cons of the Swedish international investment agreements from an economic perspective. It concludes that the older Swedish bilateral
agreements should be revised to ensure that they do not provide more protection in Sweden to investment from partner countries, than is available to investment from nonpartner countries or to Swedish domestic investment.
A central aspect of the Swedish economic integration with the outside world is out- and inward foreign direct investment (FDI). Like many other countries, Sweden has entered into a large number of state-to-state investment agreements that aim to promote FDI by protecting foreign investors against host country policy measures. Starting in 1965, Sweden has entered into approximately 70 bilateral investment treaties (BITs), and Sweden will participate as an EU member in several recently negotiated, but still not ratified, EU agreements. Additionally, Sweden is a member of the sector-specific investment agreement The Energy Charter Treaty.
On the global scene, the first international investment agreements (IIAs) appeared in the late 1950s, but most of these treaties were formed after the mid-1990s. These agreements were initially formed between a developing and a developed country, with the purpose of encouraging investment from the developed to the developing country. This was a period in which expropriations, and other types of policy interventions with similar effects, were common in developing countries. The number of investment agreements has grown rapidly over the years, and there are currently some 2 700 IIAs in force globally.
IIAs have recently become intensively debated internationally. The debate was ignited in Europe by the negotiations concerning the EU-US Transatlantic Trade and Investment Partnership (TTIP), and the Canada-EU Comprehensive Economic and Trade Agreement (CETA). IIAs are claimed to be associated with a range of problems. For instance, the substantive undertakings in the agreements are alleged to be too vaguely worded, thereby allowing arbitration panels to impose severe restrictions on host country “policy space”, that is, on their ability to take policy measures without fear of having to compensate foreign investors. It is also argued that the arbitration mechanisms in IIAs are flawed in various ways. One commonly criticised feature is that the agreements typically allow foreign investors to take host countries to arbitration outside these countries’ domestic legal systems − so called investor-state dispute settlement (ISDS). The critique has been fuelled by some contentious investment disputes. The criticism of investment agreements has not only come from “civil society”. Many internationally highly reputable academics have expressed serious concerns.
Perceived problems with investment agreements have recently caused several countries to change their agreements, both with regard to substantive undertakings and dispute settlement procedures. Among developed economies, the EU has taken the lead in these efforts. But the Swedish agreements have been left unchanged since they were negotiated, and as a result reflect thinking regarding investment protection that dates back several decades.
The purpose of this study is to discuss pros and cons of the Swedish agreements from an economic perspective. This is not the only possible way to approach these issues. For instance, investment agreements can be seen as part of foreign policy. However, a central reason for entering into, or for maintaining, these agreements is to increase Swedish economic welfare, and it is therefore desirable to evaluate their economic performance.
Section 2 of the study gives a brief overview of the main features of the Swedish IIAs from an economic point of view, and points to implications of EU membership for the Swedish investment regime. It is observed that only 0.2 percent of the stock of inward investment in Sweden 2016 came from non-EU countries with which Sweden has BITs. On the outward side, the extra-EU BITs cover less than 9 percent of the Swedish total stock of outward FDI. From this perspective it thus appears as if these BITs have virtually no effect on aggregate inward investment, and modest effect at best on aggregate outward investment.
The economic rationale for IIAs is to stimulate FDI to mutual benefit for the contracting parties. Section 3 discusses this issue from the point of view of the economic literature. The section starts with a discussion of possible links between foreign direct investment and economic growth, pointing to sources of gains for host countries, and for source countries, from FDI. It then turns to the link between investment agreements and FDI. The literature is meagre, but an emerging economic theory points to mechanisms through which investment agreements might promote investment and economic welfare for both host and source countries. It is also argued that the role of IIAs is likely to differ depending on whether the agreements are of a traditional form, between developed and developing countries, or between developed countries. Section 3 also briefly surveys the empirical literature that seeks to assess the impact of these agreements on investment.
A central point that emerges from this analysis is that an agreement will only stimulate investment if it increases the expected profits of investors. This expected increase can come about through either expected compensation payments by the host country to investors in case the host country takes measures that significantly reduce investor profits, and/or by changes of government policies in a more investor friendly direction. The host country is in either case exposed to expected costs. For a host country, an optimally designed agreement should balance the benefits of increased investment against these expected costs.
Section 4 briefly lays out the critique against investment agreements, discussing in particular the two main sources of contention − “regulatory chill” and ISDS − drawing on the analytical economic frameworks laid out in Section 3.
Section 5 illustrates recent developments in the design of IIAs by describing some novel features of CETA, and by comparing CETA with a Swedish BIT. It is shown how CETA in several regards constrains the coverage of the agreements in ways that are not found in the Swedish BIT. Section 5 also explains why we believe that the agreement in their current form provide protection to Swedish investors in the partner countries that they would not have access to absent the agreements − that is, the agreements provide additional protection. It is also explained why we believe that the BITs provide additional protection to investors from the partner countries in Sweden.
Section 6 discusses what should be done with the Swedish agreements in light of the earlier analysis, distinguishing between their effect on outward and inward investment. It is argued that the protection the agreements provide for outward FDI is beneficial to Sweden.
With regard to protection of inward investment we note that while in the past most of the partner countries did not have the capacity to invest in Sweden to any significant degree, some partner countries are rapidly developing in this regard, China and Korea being the leading examples. We should thus expect to see much more inward FDI from these countries in the future. This makes the question of whether it is desirable to give investors from these countries special protection. We argue that absent evidence to the contrary, there does not seem to be an economic rationale for protecting investment from the BITs countries.
The analysis thus leads to the conclusion that we must balance beneficial effects of the BITs on the outward side against the predominantly negative effects on the inward side. This balancing act should preferably be done by quantifying expected positive and negative effects. It would be a very demanding exercise, however, to the extent it could be done at all in a meaningful way, and it is beyond the scope of this study. Our intuition, for what it is worth, strongly suggests that the negative effects dominate, and that there is a need to reduce the level of protection in these agreements. Indeed, we cannot see any reason why Sweden should act differently in this regard than many other countries.
We believe that the level of protection in the Swedish BITs should be reduced such that investors from the BIT countries have the same level of protection as investors from other countries, as well as investors from Sweden. This would at least in principle imply that Swedish investors would have the same level of protection in the partner countries as they would have in Sweden.
Serial number: PM 2019:09
Reference number: 2018/024