Performance requirements are demands by governments for such things as technology transfer, training of local workers or local purchasing, in return for the right to invest, or for some preferential treatment of the investment (for example, tax preferences). Most older international investment agreements do not prohibit performance requirements, but WTO members are bound by the TRIMS Agreement not to condition advantages on two types of performance requirements: local content requirement and various types of export performance. Outside the WTO, the new trend in IIAs, influenced by the NAFTA, is to prohibit performance requirements more broadly.
From a sustainable development perspective, this can be problematic because, if well designed and applied, performance requirements can be effective tools to maximize the economic, environmental and social benefits of foreign investment in the host state. It is consequently important for states, particularly developing countries, to retain the possibility of using them when circumstances so warrant.
One option is to not go beyond the performance requirements prohibitions already existing under TRIMs, which only prohibit trade-related local content requirements and requirements linked to export performance. This can be done through a simple re-affirmation of WTO commitments, or by simply not dealing with performance requirements in the RTIA.
If performance requirements are prohibited, there are options for limiting the effects of the prohibition:
- Explicitly state that certain types of performance requirements will be permitted
- Specify a list of sectors in which performance requirements may be used and/or may not be used
- Include a specific exception to performance requirement prohibitions
- Grandfather existing performance requirements
- Carve out non-mandatory performance requirements
- Place performance requirement obligations outside the coverage of investor–state dispute settlement (ISDS)
Option 1:Do not include restrictions on the use of performance requirements, or simply reaffirm TRIMS obligations
When including the prohibitions by reaffirming WTO obligations under TRIMs, it should be kept in mind that, unless excluded, they will be subject to ISDS.
Examples
No mention of performance requirements:
The great majority of BITS do not mention performance requirements.
Reaffirmation of TRIMS obligations:
“The Contracting Parties reaffirm their obligations under the WTO Agreement on Trade-Related Investment Measures (TRIMs), as amended from time to time. Article 2 and the Annex of the TRIMs are incorporated into and made part of this Agreement.” (Canada-China BIT, Article 9)
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For some other options, see UNCTAD’s Investment policy framework for sustainable development (2015), pp. 101–102 (Policy Options for IIAs, Section 4.9).
Option 2:Include a provision explicitly stating that the use of performance requirements is permitted when circumstances warrant it
This provision would recognize the potential importance of performance requirements for sustainable development
Examples
“Notwithstanding any other provision of this Agreement, a State Party may
a. support the development of local entrepreneurs, and;
b. seek to enhance productive capacity, increase employment, increase human resource capacity and training, research and development including of new technologies, technology transfer and other benefits of investment through the use of specified requirements on investors made at the time of the establishment or acquisition of the investment and applied during its operation.” (SADC Model BIT, Article 22.2)
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Option 3:If performance requirements are prohibited, specify a list of sectors or types of measures to which the prohibition on performance requirements does not apply.
The state retains policy space to use performance requirements in those sectors or measures excluded from coverage.
Examples
“[Certain provisions, including the provision prohibiting Performance Requirements] shall not apply to any measure that a Party adopts or maintains with respect to sectors, subsectors or activities, as set out by that Party in its Schedule to Annex [X].” (TPP article 9.11)
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Examples
CETA’s Investment Chapter carves out various types of measures from coverage under its prohibitions on performance requirements, for example for government procurement. (Article 8.5(5)(b))
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Examples
“Nothing in paragraph [X] [prohibition on performance requirements] shall be construed to prevent a Party from conditioning the receipt or continued receipt of an advantage, in connection with an investment in its territory of an investor of a Party or of a non-Party, on compliance with a requirement to locate production, supply a service, train or employ workers, construct or expand particular facilities, or carry out research and development, in its territory.” (Australia – US FTA, Article 11.9(3)(a))
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Option 4:Include a public welfare exception to performance requirement prohibitions
This could potentially protect some environmental or health measures from challenge. A safer approach is to introduce a general exception that is applicable beyond the provisions on performance requirement prohibitions (see Section 3.6).
Examples
“[Paragraphs prohibiting certain performance requirements] shall not be construed to prevent a Party from adopting or maintaining measures to protect legitimate public welfare objectives, provided that such measures are not applied in an arbitrary or unjustifiable manner, or in a manner that constitutes a disguised restriction on international trade or investment.” (TPP, Article 9.9)
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Examples
“Provided that such measures are not applied in an arbitrary or unjustifiable manner, or do not constitute a disguised restriction on international trade or investment, paragraphs [on the prohibition of performance requirements] shall not be construed to prevent a Party from adopting or maintaining measures, including environmental measures:
…
- necessary to protect human, animal or plant life or health; or
- related to the conservation of living or non-living exhaustible natural resources.”
(Korea-Australia FTA, Article 11.9(5))
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Option 5:If performance requirements are prohibited, grandfather existing performance requirements and existing non-conforming measures in order to be able to maintain them.
Shelters existing measures from unintentionally breaching treaty obligations. A general grandfathering clause is more predictable than creating a list of non-complying laws and measures.
Examples
“[Certain provisions, including the provision prohibiting Performance Requirements] do not apply to:
a. an existing non-conforming measure that is maintained by a Party …
b. the continuation or prompt renewal of any non-conforming measure referred to in subparagraph (a); or
c. an amendment to any non-conforming measure referred to in subparagraph (a) to the extent that the amendment does not decrease the conformity of the measure, as it existed immediately before the amendment, with [Certain provisions, including the provision prohibiting Performance Requirements] …”
(CETA chapter 10, article 8.15(1))
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Examples
“Articles [including the article prohibiting performance requirements] do not apply to:
- any existing non-conforming measure that is maintained by a Party at:
- the central level of government, as set out by that Party in its Schedule to Annex [X],
- a regional level of government, as set out by that Party in its Schedule to Annex [X], or
- a local level of government;
- the continuation or prompt renewal of any non-conforming measure referred to in sub-paragraph (a); or
- an amendment to any non-conforming measure referred to in subparagraph (a) to the extent that the amendment does not decrease the conformity of the measure, as it existed immediately before the amendment, with Article [X] [prohibiting performance requirements]” (Australia – US FTA, Article 11.13(1))
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Option 6:If performance requirements are prohibited, exclude non-mandatory performance requirements (those that are a condition of some preference or advantage, as opposed to being a prerequisite for entry).
Allows states to adopt certain non-mandatory performance requirements.
Examples
“Paragraph 2 does not prevent a Party from conditioning the receipt or continued receipt of an advantage, in connection with an investment in its territory, on compliance with a requirement to locate production, provide a service, train or employ workers, construct or expand particular facilities, or carry out research and development in its territory.” (CETA, Article 8.5(3))
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Option 7:If performance requirements are prohibited, exclude the prohibition on performance requirements from the ISDS mechanism
Investors would not be able to initiate investor–state claims based on prohibition on performance requirements. This would not preclude submission to the mechanism for settling state–state disputes.
Examples
This language would be included in the section on the Scope of a Claim to Arbitration (see Section 5.4.1) rather than in the section on performance requirements.
CETA, for example, does not allow ISDS to be initiated over the breach of obligations on performance requirements—only on matters of discriminatory treatment and investment protection. (Article 8.18: Scope)
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