Australia - United States Free Trade

Australia-United States Free Trade Agreement - Guide to the Agreement

11. Investment

1.    Purpose and structure

The Investment Chapter provides investors with an open and secure environment for investment.   It ensures that investors from each Party and their investments receive national treatment or most-favoured-nation treatment (whichever is better) in the other Party.   It also provides protection for investors and their investments through prohibitions on a range of distorting performance requirements and on restrictions on transfers, and through requiring compensation equivalent to fair market value for any expropriated investment.

Any company or national in either Party investing or planning to invest in the other Party can benefit from the Chapter.   Protection for investment is provided from the pre-investment phase through the life of the investment.

The Investment Chapter does not impose any obligation on a Party to privatise.

The Investment Chapter does not apply to measures that are covered by the Chapter on Financial Services (Chapter 13).

2.    What is investment?

"Investment" is defined in Article 11.17 of the Chapter as every asset of an investor that has the characteristics of an investment (e.g. the commitment of capital or other resources, an expectation of gain or profit, or the assumption of risk), including:

The Chapter defines an "investor" of a Party as a national or an enterprise of that Party who seeks to make, is making, or has made an investment in the other Party.   Under the FTA, a "national" includes permanent residents as well as citizens.   In the Investment Chapter, an "enterprise" of a Party includes branches located in its territory, as well as incorporated companies and other entities constituted or organized under its laws.

The protections of the Investment Chapter apply to both an investor and to any "covered investment", i.e. an investment that an investor of a Party has in the territory of the other Party at the date of entry into force of the Agreement, or subsequently establishes, acquires or expands.

3.    Core obligations

3.1   Non-discrimination

The Chapter requires each Party to accord to investors of the other Party, and to covered investments, whichever is better of national treatment (Article 11.3) or most-favoured-nation treatment (Article 11.4).

National treatment means treatment no less favourable than that accorded, in like circumstances, to a Party's own investors or their investments.

Most-favoured-nation (MFN) treatment means treatment no less favourable than a Party accords, in like circumstances, to investors, or investments, of any non-Party.

The national treatment and MFN obligations apply to the establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of an investment.

3.2   Performance Requirements

Article 11.9 establishes disciplines on the use of a range of performance requirements that distort trade and investment flows.   Performance requirements are measures that impose certain requirements on the operation of a business, e.g. that the goods it produces must incorporate a certain proportion of domestically-produced inputs, or that a certain proportion of its output must be exported.

Article 11.9 prohibits each Party from imposing or enforcing any of the following requirements in relation to an investment in its territory:

a:    to export a given level or percentage of goods or services;

b:    to achieve a given level or percentage of domestic content;

c:    to purchase, use, or accord a preference to goods produced in its territory, or to purchase goods from persons in its territory;

d:    to relate in any way the volume or value of imports to the volume or value of exports or to the amount of foreign exchange inflows associated with an investment;

e:    to restrict sales of goods or services in its territory that an investment produces or supplies by relating such sales in any way to the volume or value of its exports or foreign exchange earnings;

f:    to transfer a particular technology, a production process, or other proprietary knowledge to a person in its territory; or

g:    to supply exclusively from its territory the goods that an investment produces or the services it supplies to a specific regional market or to the world market.

In addition, the Parties may not condition the receipt or continued receipt of an advantage on compliance with the requirements in Categories b. to e.

The disciplines in Article 11.9 apply to all investments, whether by US investors, domestic investors, or investors from a non-Party.

Article 11.9 also contains a number of exceptions, which allow some of the performance requirements in Categories a. to g. to be used in several specified circumstances, such as government procurement, actions related to intellectual property rights or competition laws, and measures necessary to protect human, animal or plant life or health.

3.3   Senior Management and Boards of Directors

Article 11.10 provides that a Party cannot require that an enterprise that is a covered investment appoint individuals of any particular nationality to senior management positions.   However, a Party may require that a majority or less of the board of directors (or any committee thereof) of an enterprise that is a covered investment be of a particular nationality or be resident in its territory, provided that this requirement does not materially impair the ability of that investor to exercise control over its investment.

4.    Non-conforming measures

Article 11.13 allows the Parties to maintain or adopt certain measures that are not consistent with the provisions of the obligations on National Treatment, MFN Treatment, Performance Requirements, and Senior Management and Boards of Directors (i.e. "non-conforming measures").   These non-conforming measures must be identified in individual Schedules for each Party that are contained in two Annexes to the Agreement:

The Schedules to Annex I and II represented a carefully negotiated balance of commitments between the Parties.   An example of entries the Parties have included in their Schedules is the approach Australia has taken with regard to its foreign investment policy.   This is described in the box below.

The outcome of the negotiations liberalises Australia's foreign investment policy while retaining the right for the Government to examine all investment of major significance.

It does this through the following reservations in Australia's schedules in Annex 1 and Annex II:

In addition to the measures identified in the Schedules, Article 11.13 provides that the articles on National Treatment, MFN Treatment, and Senior Management and Boards of Directors do not apply to government procurement or to subsidies or grants provided by a Party.

5.    Other obligations

5.1   Minimum Standard of Treatment

Article 11.5 requires a Party to treat covered investments in accordance with the "customary international law minimum standard of treatment of aliens".

Annex 11-A confirms the understanding of the Parties that "customary international law" is law that results from a general and consistent practice of countries that they follow from a sense of legal obligation.   It also confirms that the customary international law minimum standard of treatment of aliens refers to all customary international law principles that protect the economic rights and interests of aliens.

Two important aspects of this customary international law minimum standard of treatment of aliens are:

5.2   Treatment in Case of Strife

Article 11.6 provides protection for an investor of the other Party or their covered investment for loss due to armed conflict or civil strife in the territory of a Party.   If the latter takes action relating to such losses (e.g. by setting up a compensation system), then it must accord the investor of the other Party or their covered investment treatment no less favourable than the treatment accorded, in like circumstances, to:

5.3   Expropriation and Compensation

Article 11.7 provides that a Party may not directly expropriate or nationalise a covered investment ("direct expropriation"), or indirectly do so through measures equivalent to expropriation or nationalisation ("indirect expropriation"), except for a public purpose, in a non-discriminatory manner, in accordance with due process of law, and on payment of prompt, adequate and effective compensation.   The compensation must be:

Annex 11-B provides guidance on the operation of the expropriation article.   A country's action can only constitute an expropriation if it interferes with a tangible or intangible property right or property interest in an investment.   The determination as to whether an indirect expropriation has occurred requires a case-by-case, fact-based inquiry, with some relevant factors identified in Annex 11-B.   Except in rare circumstances, non-discriminatory regulatory actions of a Party that are designed and applied to protect legitimate public welfare objectives, such as the protection of public health, safety, and the environment, do not constitute indirect expropriations.

5.4   Transfers

Article 11.8 requires that each Party must allow all transfers relating to a covered investment (e.g. contributions to capital, transfers of profits and dividends, payments of interest and royalties, and payments under a contract) to be made freely and without delay into and out of its territory, and must allow such transfers to be made in a freely usable currency as determined by the International Monetary Fund (i.e. currently the United States dollar, the Japanese Yen, the Euro, and the British Pound) at the prevailing market rate of exchange.

A Party must allow returns in kind relating to a covered investment to be made in the way set out in any written agreement between that Party and a covered investment or an investor of the other Party where that written agreement takes effect on or after the date of entry into force of the FTA.

A Party can still prevent or delay such transfers through the equitable, non-discriminatory, and good faith application of laws such as on bankruptcy.

6.    Other provisions

6.1   Investment and Environment

Article 11.11 states that nothing in the Investment Chapter prevents a Party from taking measures otherwise consistent with the Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns.

6.2   Denial of Benefits

Article 11.12 provides that a Party may deny the benefits of the Investment Chapter to an investor of the other Party if it is an enterprise that is owned or controlled by investors of a non-Party, and the denying Party:

A Party may also deny the benefits of the Investment Chapter to an investor of the other Party that is an enterprise that:

6.3   Implementation

Article 11.15 provides for the Parties to meet annually, or as otherwise agreed, to discuss the implementation of the Chapter.

6.4   Investor-State dispute settlement

In recognition of the Parties' open economic environments and shared legal traditions, and the confidence of investors in the fairness and integrity of their respective legal systems, the Investment Chapter does not establish an investor-state dispute settlement mechanism.   Article 11.16 provides that the Parties may consider establishing such a procedure to hear a claim by an investor, if there is a change in these circumstances regarding the Parties' economic and legal environments.

March 6, 2004

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