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DICTIONARY OF TRADE TERMS

The intent of this dictionary was to produce a broad listing of terms, which are commonly used in trade negotiations and especially within the context of the Free Trade Area of the Americas (FTAA) with a view to providing an information tool for the public at large. The dictionary is presented in the four official languages of the FTAA: English, Spanish, Portuguese and French.

The compilation does not attempt to present the entire universe of terms used nor does it seek to prejudge or to affect in any way definitions or approaches currently proposed by any country in any trade negotiation. In fact, many of the definitions included in the publicly-available Draft FTAA Agreement which are still the subject of difficult debates have been excluded from this dictionary. The definitions are based on widely available source material including other trade agreements.

An alphabetical listing of the terms is included to facilitate the use of the dictionary. The terms and their definitions are presented by general negotiating theme found in the FTAA and in other trade negotiations.

An electronic version of this document can be found on the following websites: IADB, OAS,  and ECLAC.


 


IADB
 


OAS
 

ECLAC


INVESTMENT
TERM DEFINITION
Bilateral investment treaty (BIT) The first modern bilateral investment treaty was entered into in 1959 between Germany and Pakistan. Over the decades that followed an increasing number of European countries concluded such treaties with developing countries. Since the 1980s, several countries in the Americas have signed a BIT with another country of the region. Traditionally, BITs set standards for the promotion and legal protection of foreign investments and investors. Some recent agreements also include the free entry of investments and investors as a feature of the treaty.
Compensation for losses Investment agreements do not, in principle, require a state to pay compensation in a situation where an investor of another member country suffers losses in the host country due to war or other armed conflict, civil disturbances, state of emergency or similar events. Most agreements, however, provide for national treatment and most-favored-nation treatment in respect to any measure a member country adopts or maintains related to those losses.
Denial of benefits A Party to a trade or investment agreement may deny the benefits of the Agreement to an investor of another Party that is an enterprise of such other Party and to investments of that investor if investors of a non-Party own or control the enterprise and the denying Party does not maintain diplomatic relations with the non-Party; or adopts or maintains measures with respect to the non-Party or an investor of the non-Party that prohibit transactions with the enterprise or that would be violated or circumvented if the benefits of the Agreement were accorded to the enterprise or to its investments. See Services, page 38, where this text may have a slightly different meaning.
Expropriation Investment agreements include a provision that prohibits a member country from directly or indirectly nationalizing or expropriating an investment of an investor of another member country except when done for a public purpose, on a non­discriminatory basis, in accordance with due process of law, and on payment of compensation. In an international context, a direct expropriation occurs when the host state takes property owned by a foreign investor located in the host state, when there is deprivation of wealth attributable to the state. There are very few cases of indirect expropriation at the international level because under customary international law, a state is not responsible for loss of property or other economic disadvantage resulting from bona fide general taxation, regulation, forfeiture from crime, or other action of the kind. The state has the power to take actions, in the public interest, without having to pay compensation, even if the interests of individual property owners may be adversely affected.
Foreign direct investment (FDI) FDI is defined as a cross-border investment in which a resident in one economy (the direct investor) acquires a lasting interest in an enterprise in another economy. The lasting interest implies a long-term relationship between the direct investor and the enterprise and usually gives the direct investor an effective voice in the management of the enterprise. By convention, a direct investment is established when the direct investor has acquired 10 percent or more of the ordinary shares or voting power of an enterprise abroad.
General exceptions Investment agreements usually include general exceptions, which apply to all Parties to the Agreement and exempt these Parties from the provisions of the Agreement. These exceptions usually refer to measures taken for national security, public order, and international peace and security.
International Centre for Settlement of Investment Disputes (ICSID) The International Centre for Settlement of Investment Disputes was established in 1966 under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention). ICSID provides facilities for the conciliation and arbitration of disputes between member countries and investors who qualify as nationals of other member countries. All Contracting States of ICSID are required to recognize and enforce ICSID arbitral awards.
ICSID Additional Facility Rules Since 1978 the ICSID Secretariat has been administering certain types of proceedings between States and foreign nationals which fall outside the scope of the ICSID Convention. These include conciliation and arbitration proceedings where either the State party or the home State of the foreign national is not a member of ICSID.
Investor-State dispute settlement mechanism Investment agreements generally include provisions for an investor-state dispute settlement mechanism whereby an investor of a Party is able to seek redress against another Party. In most investment agreements, the investor may choose between the local courts and international arbitration. In some agreements, this choice is final, in order to avoid simultaneous procedures and contradictory decisions. A disputing investor may submit a claim to arbitration under some specific rules of arbitration, for example the ICSID Convention, the Additional Facility Rules of ICSID, or the UNCITRAL Arbitration Rules. It is worth noting that the objective of an investor-state dispute settlement mechanism is to depoliticize investment disputes and put them into the sphere of international arbitration.
Key personnel This term has generated many interpretations because it comprises two dimensions: freedom to hire and temporary entry. The freedom to hire refers to the right granted to the investor to employ, in senior management positions, personnel within the host country without regard to the nationality or citizenship of the person concerned. The temporary entry of key personnel refers to the right granted to the investor to enter the host country or to bring key personnel, essential to a specific operation of an investment. Personnel is subject to immigration laws and laws and regulations relating to the entry, stay, and work of natural persons.
Minimum standard of treatment This concept is found in several investment agreements. It means that the host country will accord treatment to investments of foreign investors in accordance with the international norms encompassed by the customary international law minimum standard. In general, States would fail to meet the minimum standard of treatment if their acts amounted to an outrage, bad faith, or an insufficiency of governmental action so far short of international standards that every reasonable and impartial person would readily recognize its insufficiency.
Most favored nation treatment (MFN) This principle contained in trade and investment agreements ensures that there is no discrimination among foreigners. It guarantees that foreign investors and their investments (those of another member country of the trade or investment agreement) are treated no worse than any other foreign investors and their investments. See Services, page 39, where this text may have a slightly different meaning.
National treatment This principle contained in trade and investment agreements ensures that there is no discrimination between foreigners and nationals. It guarantees that foreign investors and their investments (those of another member country of the trade or investment agreement) are treated no worse than domestic investors and their investments. See Services, page 39 and Tariffs and Non-tariff Measures, page 43, where this text may have a slightly different meaning.
Negative List Under a negative list approach, all sectors and measures covering investment must be liberalized unless otherwise specified in annexes containing reservations or a list of non-conforming measures.
Non-conforming measures A non-conforming measure is any law, regulation, procedure, requirement or practice, which violates certain articles of the investment agreement. For example, a law prohibiting an investor of another member country to own a factory does not conform with the article on national treatment.
Performance requirements Are used by countries to influence the behavior of investors. Traditionally, two types of performance requirements have been identified: mandatory performance requirements and incentive-based performance requirements. Mandatory performance requirements are conditions or requirements that are imposed at the pre- and/or post-establishment phases, i.e. for the establishment and/or operation of an investment. Incentive-based performance requirements are conditions that an investor must meet to secure a government subsidy or incentive. See Government Procurement, page 27 and Tariffs and Non-tariff Measures, page 44, where this text may have a slightly different meaning.
Portfolio investment It refers to shares, stocks or other forms of equity participation in an enterprise.
Post-establishment It refers to the operation of an investment. It guarantees that foreign investors and their investments (those of another member country of the trade or investment agreement), once established or admitted, are treated no worse than domestic investors and their investments (national treatment) or any other foreign investors and their investments (most-favored-nation treatment).
Pre-establishment It refers to the entry of investments and investors of a Party (member country of a trade or investment agreement) into the territory of another Party. Each Party allows investors of other Parties to establish an investment in their territory on terms no less favorable than those that apply to domestic investors (national treatment) or investors from third countries (most-favored-nation treatment). In the case of the provision on performance requirements, pre-establishment refers to the prohibition of imposing certain performance requirements as a condition for the establishment of an investment. Pre-establishment is rarely granted without exceptions since every country has sensitive sectors where foreign investment is not permitted. In fact, members of a trade or investment agreement usually list a number of measures (for example, laws and regulations) or entire sectors where pre-establishment (free entry of investments and investors) does not apply.
Ratchet mechanism Some trade and investment agreements include this mechanism under which any liberalization measures adopted by a member country cannot be replaced by new measures that are more restrictive.
Reservations They define any limitations to the commitments of the member countries to the investment agreement. They are specific to each country to a trade or investment agreement, and are taken against a limited number of provisions.
Standstill Under this principle, member countries in a trade or investment agreement commit themselves to the imposition of the status quo on existing measures and practices which do not conform to a number of obligations such as national treatment and most-favored-nation treatment. Member countries commit themselves not to introduce new legislation that would violate these obligations. Standstill do not apply, however, to any general exceptions (e.g. national security) or to any temporary derogations (e.g. balance-of-payments), or to any exceptions (reservations) for future measures taken by these countries.
Transfers The provision on transfers set out in several investment agreements guarantees that all payments relating to an investment of an investor of another member country can be transferred in a freely convertible or usable currency at the market rate of exchange prevailing on the date of transfer. In some cases, these agreements allow for limitations or exceptions, such as for balance-of payments problems.
Ad-hoc Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL) Under the investor-state dispute settlement mechanism, an investor may submit a claim to arbitration under some specific rules of arbitration such as the ad-hoc arbitration rules of the United Nations Commission for International Trade and Law.