COVID-19 and the gloomy outlook for global investment: freefall, protectionism and disputes

August 2020 | EXPERT BRIEFING | FINANCE & INVESTMENT

financierworldwide.com

The exceptional circumstances caused by the coronavirus (COVID-19) pandemic provoke a state of amazement, mobilisation and union to defeat ‘the enemy’ on all continents. The ubiquitous wide-ranging threats, accompanied by fear and uncertainty, lead to contemporary actions and reliance. To date, we do not entirely know what these contemporary actions signify for the global economy, especially as some sectors and economies are more vulnerable than others to this pandemic.

A pandemic is a mixture of three things which unavoidably affect global and regional foreign direct investment (FDI): (i) a mix of health and economics; (ii) an ability to spread quickly and universally; and (iii) an impact that causes all economies to suffer in the demand and supply cycle. A number of factors, including exposure, vulnerability and resilience by a country, determine the economic risk of that particular state, which further complicates the global equation. In any case, the policies adapted by developed countries have negatively affected emerging countries due to reduced trade and investment. For now, the measures adopted by states can be divided into either short-term or long-term targets. According to a ‘United Nations Conference on Trade and Development’ report in April 2020, the worst-hit industries are energy (down 208 percent), airlines (down 116 percent) and automotive (down 47 percent).

The unpredictability of global capital flows due to COVID-19 has led the prospects of FDI into deep waters. The prospects of FDI take three main forms: free fall, rising protectionism, and the risk and probability of disputes. All this combined will further complicate the global FDI scenario.

Freefall: downward pressure on foreign investment

The Investment Trends Monitor put forward the view that the downward pressure on FDI could see it drop 30 to 40 percent during 2020-21. It also tells us that the earnings estimate of the top 5000 multinational enterprises (MNEs) may be revised downward by an average of 30 percent for 2020.

In order to tackle these ruinous economic effects, investment policies will play a crucial role. The pandemic may freeze the trend toward screening FDI, especially in industries of crucial importance. Concurrently, as states try to recover from the downswing of supply chains, the pandemic may work as a catalyst to increase competitiveness between states seeking to attract FDI in other industries.

China expanded its support to foreign companies so that they can benefit from the same government policies as Chinese companies, to help balance the industrial supply chain. G20 leaders also implemented policies to shield workers, businesses, micro, small and medium-sized enterprises (MSMEs) and sectors suffering the most. In addition, they also injected $5 trillion to resist the social, economic and financial impact of the pandemic.

Protectionism: public security on the upswing

According to an article ‘How coronavirus is changing the rules on foreign investment in essential areas’ by The Conversation, countries have started to implement screening measures on incoming FDI, especially from China. The EU has introduced guidance for screening FDI, and also impelled its members to protect public security by shielding “companies and critical assets” in the health sector from foreign dominance.

On 29 March 2020, the Australian treasurer declared temporary measures to reduce investment review for all sectors to nil. On the same footing, France and Spain reduced their investment screening threshold to 25 percent and 10 percent respectively on non-EU FDI flows. On 1 April 2020, Spain also introduced guidelines which aim to protect public security, order and health. India strengthened its FDI regulations because of a fear of Chinese takeovers.

This trend of protecting national security has now been adopted by several nations under the umbrella of COVID-19, to safeguard broader economic and social issues.

Disputes: why investment wars have no winners

The measures adopted by different countries has elevated concerns about future foreign investment claims. International law will have a crucial role to play when the time comes to take responsibility and a variety of legal questions need to be answered. According to the Global Arbitration Review, an investment claim is threatening the state of Peru, as the government recently enacted a bill – in light of COVID-19 – which suspended toll collections on highways, including those handled by private corporations.

A new wave of countless legal discussions is approaching us, as not all measures to tackle the pandemic have been effective. Besides, interference in supply chains and consumer preferences will disfigure international trade, and some corporations will be affected in the long term, rather than the short term. Any evaluation of investor operations will be muddled. It is evident that this pandemic cannot be used as a cover for new rules and laws. It is likely that governments have enacted some questionable measures to tackle the pandemic. There will be an inescapable increase in numerous complex issues, especially in investment treaties, as different governments have established different measure to tackle the pandemic.

A pivotal role will be played by international investment tribunals in reviewing the measures adopted by different states to address the pandemic. There are probably a vast number of measures that will cause loss to businesses and may be challenged under investment treaties by foreign investors. Specifically, there are some measures that have created misery only for businesses. Tribunals have to meticulously examine measures taken to tackle the pandemic. A crucial role will be played by the law of exception, which may shield many of the problematic measures adopted by the state.

Many bumps in the road ahead

The COVID-19 turmoil is just in its infancy. It still has to reach the global south, which includes Bangladesh, Yemen, South Sudan, as well as in refugee camps in Pakistan and Syria, among others. The world has not yet seen all of its gigantic economic, cyclical and structural effects.

A wide range of potential innovations have already appeared, which propose that tribunals could further analyse the scope and authority of the application of different exceptions. Furthermore, policymakers may want to articulate better linkages between international investment agreements (IIAs) and World Health Organization (WHO) regulations.

There is only a finite number of opportunities accessible to foreign investors at present, and those are obtainable at immeasurable risk. Foreign investors have become more demanding due to this extraordinary situation. As this pandemic continues to devastate global economies, it is apparent that this will be detrimental to FDI. The only unanswered question is the magnitude of this decline.

Julien Chaisse is professor of law at the City University of Hong Kong and Arjun Solanki is an associate at World Trade Advisors (WTA) Group. Prof. Chaisse can be contacted on +852 3442 8008 or by email: julien.chaisse@cityu.edu.hk. Mr Solanki can be contacted on +91 9953 172 555 or by email: solankiarjunlaw@gmail.com.

Julien Chaisse

City University of Hong Kong

Arjun Solanki

World Trade Advisors (WTA) Group