There is no universally agreed definition relating to performance requirements (Performance Requirements).1 Some scholars define them as “host State control techniques on [an] operational level”,2 others as “host country operational measures”3 or “investment incentives”.4 In principle, Performance Requirements are regulatory conditions imposed by host States requiring investors to achieve certain economic and social goals in relation to the establishment or operation of their investments.5
II. Effect of Performance Requirements
Performance Requirements are intended to oblige foreign investors to conduct their investment activities in a way beneficial for the host State’s economy.6 The effectiveness of Performance Requirements to achieve this end remains disputed.7 Some take the view that Performance Requirements are inefficient and might have a distorting effect detrimental to international trade and investment.8 Other studies instead consider that Performance Requirements may produce – and have actually produced in certain circumstances – economic and social benefits that outweigh any efficiency losses.9
III. Categories of Performance Requirements
Performance Requirements explicitly prohibited at a multilateral level by the WTO Agreement on Trade-Related Investment Measures (“TRIMs Agreement”)10 because they are inconsistent with:
These two prohibitions apply only to measures related to trade in goods (and not services) imposed on both domestic and foreign investors. The TRIMs Agreement was entered into in reaction to the findings by the 1984 GATT panel decision in relation to the Canada Foreign Investment Review Act (“FIRA Panel”).11
Performance Requirements that are explicitly prohibited, conditioned or discouraged by International Investment Agreements (IIAs) at, interregional or regional levels (e.g., joint ventures or domestic equity, exports, technology transfer, research and development [“R&D”], employment and training Performance Requirements).
Performance Requirements not prohibited by the TRIMs Agreement or IIAs generally because they are deemed to be aimed at addressing social, environmental or other public-interest concerns.12 As detailed below, permitted Performance Requirements may appear in the form of advantage-conditioning Performance Requirements, as well as via exceptions (general or specific) or reservations to Performance Requirement prohibitions under the relevant treaty.
IV. Prohibition of Performance Requirements in International Investment Agreements (IIAs)
A. IIAs with no reference to Performance Requirements
Traditionally, international investment agreements make no reference to Performance Requirements.13 However, despite the silence of some IIAs on the matter, if the signatory States are also parties to the WTO, they will still be subjected to the limitations of the TRIMs Agreement. In this scenario, any disputes related to Performance Requirements prohibited by the WTO must be submitted to the WTO dispute settlement mechanism (and not to the any dispute settlement provided under the IIA).14
B. IIAs expressly prohibiting Performance Requirements
An increasing number of IIAs expressly prohibit Performance Requirements. These agreements – which originally included mainly bilateral investment treaties (“BITs”), foreign investment promotion and protection agreements (“FIPAs”) and investment chapters in Free Trade Agreements (“FTAs”) signed by the US,15 Canada, and Japan16 – may be grouped in three types, depending on whether the IIAs expressly prohibit:
V. Advantage-conditioning in relation to Performance Requirements
Certain IIAs authorize Performance Requirements (e.g., Article 1106(3) and 1106(4) of the North American Free Trade Agreement [NAFTA]) in exchange for certain advantages (e.g., tax concessions, infrastructure development or subsidies).25 Typically, FTAs that follow the NAFTA Model address the relationship between Performance Requirements and the receipt of advantages as follows:
VI. Exceptions and reservations to Performance Requirements
IIAs that contain Performance Requirements prohibitions often provide for carefully crafted exceptions and reservations, including:
VII. Performance Requirements and other clauses in IIAs
Several clauses contained in IIAs might have the same effect as TRIMs or “TRIMs + specific clauses”, including:
VIII. Case Law on Performance Requirements
A. Under the North American Free Trade Agreement (NAFTA)
At time of writing, nine known cases have addressed Performance Requirements under Article 1106 of NAFTA, namely:
A review of these cases reveals an inconsistent approach by arbitral tribunals.44 As detailed in paragraphs below, in the three corn syrup cases, two tribunals found that the same measure breached the same clause examining the de facto effect of the measures,45 while one arbitral tribunal found no breach.46
1. Performance Requirements prohibition under Article 1106 of NAFTA
a. The interpretation and scope of prohibited “requirement” under Article 1160(1) of NAFTA
Most arbitral tribunals favoured a “strict”47 interpretation and have stated among others that:
Other arbitral tribunals have favoured instead a broader interpretation, according to which:
b. The notion of “advantage” under NAFTA Article 1106(3)
c. The degree of “connection” between the “advantage” and the investment under NAFTA Article 1106(3)
2. The reservations to the Performance Requirements prohibition under NAFTA Article 1108.
a. The scope of the reservation under NAFTA Article 1108
b. The notion of procurement under NAFTA Article 1108(7)(a)
Tribunals have interpreted this notion broadly.57 According to this interpretation procurement includes:
c. The applicability of Article 1108 NAFTA reservation to “new subordinate” non-conformity measures under Article 2(f)(ii) of NAFTA
Specifically, to benefit from Article 1108 reservation, a new subordinate measure under Article 2(f)(ii) must:
B. Cases involving other IIAs
In Cargill v. Poland, the arbitral tribunal, inter alia, found: (i) quotas to constitute performance requirements under Article II of the Poland-United States Business and Economic Relations Treaty;62 and (ii) no breach of this provision because the claimant had failed to establish that the performance requirements were imposed as a condition of the expansion of its investment.63
In Lemire v. Ukraine, the arbitral tribunal held that the requirement under Ukraine law, according to which 50 per cent of each station’s broadcasting time had to be reserved for music produced in Ukraine did not constitute a prohibited performance requirement under Article II.6 of the Ukraine-United States BIT because the challenged measure pursued the legitimate goal compatible with Article II.6 i.e., promoting “Ukraine’s cultural inheritance”.64
In Rusoro Mining v. Venezuela, the arbitral tribunal found that the increase in a previously agreed restrictions on the volume in the exportation of gold constituted a performance requirement in breach of Paragraph 6(d) of the Annex to the BIT.65
Collins, D. and Park, T.J., Interaction of Tax Incentives and Performance Requirements in Bilateral Investment Treaties: It’s Role in Implementing Right Institutions in Developing Countries, Fordham International Law Journal, 2017, pp. 207-226.
Huiping, C., OECD’s Multilateral Agreement on Investment A Chinese Perspective, 2002, p. 73.
Kumar, N., Use and Effectiveness of Performance Requirements: What can be Learnt from the Experiences of Developed and Developing Countries?, in UNCTAD, The Development Dimension of FDI: Policy and Rule-making Perspectives, UNCTAD/ITE/IIA/2003/4, 2003.
Newcombe, A. and Paradell, L., Law and Practice of Investment Treaties: Standard of Treatment, 2009.
Trebilcock, M. J. and Howse, R., The Regulation of International Trade, 3rd ed., 2005.
Schacherer, S. and Hoffmann, R.T., International Investment Law and Sustainable Development, in Krajewski, M., and Hoffmann, R.T. (ed.), Research Handbook of Foreign Direct Investment, 2019.
Vandevelde, K.J., United States Investment Treaties: Policy and Practice, 1992.
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