Author

Dr Catherine Edoardova Costaggiu

Ph.D. in international law and economics - Bocconi University

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Performance Requirements

I. Definition

1.

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

2.

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

3.

Performance Requirements may include different types of measures. UNCTAD divides them into three categories on the basis of their regulation under international law, namely:

i..

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:

  1. The principle of national treatment under Article III of GATT 1994 (i.e., local content or sourcing and trade-balancing Performance Requirements); or
  2. The general prohibition or quantitative restrictions on imports and exports (i.e., foreign exchange restrictions and export controls Performance Requirements) under Article XI of GATT 1994.
4.

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

ii..

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).

iii. .

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

5.

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

6.

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:

  1. TRIMs Agreement Performance Requirements by cross reference (“TRIMs clauses”), under the heading “performance requirements”.17 In such circumstances, disputes related to the TRIMs Agreement will be subject to the investor-State dispute settlement (ISDS) mechanism under the relevant IIA, unless expressly excluded.18
  2. TRIMs Agreement-like Performance Requirements regarding domestic content, sourcing and trade balancing requirements linking export and import levels.19
  3. Performance Requirements different from the one incorporated in the TRIMs Agreement (“TRIMs + Clauses”), including joint venture,20 domestic equity,21 technology transfer,22 employment, research and development (“R&D”).23 In certain cases, these Performance Requirements are provided in addition to the TRIMs Agreement prohibitions24 or TRIMs Agreement like-prohibitions.

V. Advantage-conditioning in relation to Performance Requirements

7.

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:

  1. No Party may condition the receipt of an advantage “in connection with an investment” on domestic content and trade balancing requirements;
  2. No Party is prevented from conditioning receipt of an advantage “in connection with an investment” on the requirements to export given level of percentage of goods and services, to transfer technology, or to act as an exclusive supplier; and
  3. Parties may provide investor with an advantage in exchange for “a requirement to locate production, provide a service, train or employ workers, construct or expand particular facilities, or carry out research and development”.26 

VI. Exceptions and reservations to Performance Requirements

8.

IIAs that contain Performance Requirements prohibitions often provide for carefully crafted exceptions and reservations, including:

  1. General exceptions related to measures taken to protect the environment and human health, as long as these measures are not applied in an arbitrary or unjustifiable manner, or do not otherwise constitute a disguised restriction on international trade or investment;27
  2. Specific exceptions (e.g., in relation to export promotion and foreign aid programs,28 government procurement,29 qualification requirements for preferential tariffs and quotas,30 subsidies,31 and court, administrative tribunal or competition authority enforcement orders designed to remedy a practice determined to be anti-competitive under a party’s laws on the prevention of anti-competitive behaviour);32 and
  3. Reservations allowing parties to maintain and amend existing measures that do not conform to the treaty at the time of its entry into force (i.e., non-conforming measures).33 

VII. Performance Requirements and other clauses in IIAs

9.

Several clauses contained in IIAs might have the same effect as TRIMs or “TRIMs + specific clauses”, including:

  1. National Treatment clauses, which impose on States the obligation to accord foreign investors and investments treatment no less favourable than it accords to domestic investors and their investments.34
  2. Most Favoured Nation clauses, which impose on States the obligation not to grant to investors of the other party “less favourable treatment” than the treatment granted to investors of any non-party State. Unless expressly excluded from the relevant international investment agreement, an investor protected by a treaty without a Performance Requirement prohibition may use the Most-Favoured-Nation clause to import a prohibition from another of the host State’s treaties and benefit from it as a more favourable treatment.35
  3. Pre-establishment rights clauses, i.e., clauses that extend the benefit of National Treatment and Most-Favoured-Nation treatment in relation to the condition for entry or establishment of investments in the territory (so-called investment liberalization or pre-establishment rights).36
  4. A fair and equitable treatment standard that could be linked to a Performance Requirement prohibition.37 Arbitral tribunals have addressed the issue as to whether certain measures amounting to performance requirements were themselves unfair and unequitable and, therefore, in breach of the fair and equitable treatment standard.38

VIII. Case Law on Performance Requirements

10.

Few tribunals have addressed Performance Requirements so far. Most cases have addressed Performance Requirements under NAFTA.39 A few have raised Performance Requirements under bilateral investment treaties.40

A. Under the North American Free Trade Agreement (NAFTA)

11.

At time of writing, nine known cases have addressed Performance Requirements under Article 1106 of NAFTA, namely:

  1. Three cases in which the tribunal found a breach of NAFTA;41
  2. Five cases in which the tribunal found no breach of NAFTA;42 and
  3. One case in which the tribunal dismissed the claim on jurisdictional grounds.43

12.

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 

13.

Most known cases have addressed, among others, the following issues in relation to: (1) Performance Requirements prohibition under Article 1106 of NAFTA; and (2) Reservations to the Performance Requirements prohibition under Article 1108 of NAFTA.

1. Performance Requirements prohibition under Article 1106 of NAFTA

a. The interpretation and scope of prohibited “requirement” under Article 1160(1) of NAFTA

14.

Most arbitral tribunals favoured a “strict”47 interpretation and have stated among others that:

  1. Prohibited Performance Requirements are only these requirements expressly listed in Article 1106(1)—with a further elaboration in Article 1160(3)—and this provision cannot be broadened beyond their express terms, as indicated by Article 1106(5);48
  2. To fall within the scope of Article 1106(1) the challenged measure should have a clearly stated compulsory aim to impose or enforce (i.e., de jure effect);49 and
  3. Potential “incidental consequences” of the challenged measures are irrelevant.50

15.

Other arbitral tribunals have favoured instead a broader interpretation, according to which:

  1. The close list of enumerated impermissible performance requirements under NAFTA Article 1160(1)-(3) should not be read restrictively;51 and
  2. relevance should be given to de facto effect of the relevant measures.52

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)

17.

Tribunals found this connection to exist when the measure is “integrally related to the investment”54 or has had a “detrimental effect on the profitability of the investment”.55

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)

19.

Tribunals have interpreted this notion broadly.57 According to this interpretation procurement includes:

  1. Formal procurement (i.e., “procurement by way of formal purchasing procedures” which are “frequently utilized as an instrument of policy); and
  2. Procurement activities not limited to government use that yield maximum benefit to the local economy.58

c. The applicability of Article 1108 NAFTA reservation to “new subordinate” non-conformity measures under Article 2(f)(ii) of NAFTA

20.

Specifically, to benefit from Article 1108 reservation, a new subordinate measure under Article 2(f)(ii) must:

  1. Not “unduly expand the nonconforming features” of the original non-conformity measure, rather than simply being “consistent with” the same (as expressly required under Article 2(f)(ii) of NAFTA);59 and
  2. Conform to the entirety of the “legal framework” (i.e., the non-conformity measure itself and prior subordinate measures taken in application of the subordinate measure), rather than just the non-conformity measure itself.60

21.

This narrow interpretation has been subject to a dissenting opinion.61

B. Cases involving other IIAs

22.

Three known cases have addressed Performance Requirements under international investment agreements other than NAFTA, namely:

i..

Two cases in which the tribunals found no breach of the treaty:

23.

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

24.

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

ii..

One case in which the tribunal found a breach of the treaty:

25.

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

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