Significance & Impact Of The Japan-Vietnam Agreement For The Liberalization, Promotion & Protection Of Investment

Introduction

To boost flagging foreign investor confidence in Vietnam and to stem ebbing levels of foreign direct investment ("FDI") into the Socialist Republic, the governments of Vietnam and Japan inked an agreement for The Liberalization, Promotion And Protection Of Investment ("LIPPIA" or "the Agreement") in Tokyo on 14 November 2003.

Signed at the Japanese Ministry of Foreign Affairs by Vietnamese Minister of Planning and Investment Vo Hong Phuc and Japanese Minister of Foreign Affairs Yoriko Kawaguchi, the Agreement was hailed by both countries as a big step forward in the progressive liberalization of Vietnam's tightly-controlled market.

Japan viewed the LIPPIA as an in-principal guarantee of "national treatment and most-favored national treatment to the investors and their investments of both countries (sic) at the stage of pre-investment" and expects it to contribute towards "creating a more transparent and favorable environment for the investors in each country"1.

Phuc was likewise "very optimistic" about the investment climate that the LIPPIA would foster, and further assured investors that from henceforth, "there will be no sudden change in the rules of the game"2

Against such a backdrop, this article sets out to explore the following issues:

The scope of application and salient features of LIPPIA;

Its impact on both potential investors and existing investors in Vietnam;

How it compares to other bilateral trade agreements signed by Vietnam such as the U.S.-Vietnam Agreement on Trade Relations of July 2000 ("the U.S.-Vietnam BTA"); and

Whether, if at all and if so how, the Agreement will accelerate Vietnam's goal of joining the World Trade Organization ("WTO") in 2005.

Scope Of Application And Salient Features

Comprising 23 articles, two annexures and a 3-sheet Agreed Minutes providing clarifications on applications and interpretations of the Agreement , all of which are contained in 25 pages, the LIPPIA is only a fifth the thickness of the 125-page U.S.-Vietnam BTA. Its apparent brevity, however, belies its significance to the two signatory countries in that the LIPPIA is viewed as a landmark agreement to both Japan and Vietnam3.

Investor and investment defined

Drafted broadly, the LIPPIA is intended to apply to investors who are natural persons as well as a wide spectrum of legal persons as defined under both Vietnamese and Japanese law4 The type of investments contemplated is also as wide-ranging, if not more so, covering "every kind of asset owned or controlled, directly or indirectly, by an investor"5 in both countries, including the following:

A duly constituted enterprise;

Shares, stocks or other forms of equity financing and derivative rights therein;

Bonds, debentures, loans and other forms of debt financing and derivative rights therein;

Rights under contracts ranging from turnkey and construction contracts to management and revenue-sharing contracts;

Claims to money and to any performance under contract having a financial value;

Intellectual property rights including trademarks, industrial designs, copyright and patents;

Concession rights such as those for the exploration and exploitation of natural resources;

Property rights, both tangible and intangible, and relating to both movable and immovable property, such as leases, mortgages, liens and pledges; and

Amounts earned from investments, including profit, interest, capital gains, dividends, royalties and fees6.

National treatment and Most Favored Nation status

Under the Agreement, the in-principle guarantee of national treatment and most favored nation status is generally accorded to investors and investments of both countries in the following areas:

Investment activities7;

Access to all manners of courts and administrative tribunals to pursue or to defend one's rights8;

Compensation for losses due to war or a state of emergency9; and

Taxation measures10.

What it means is that an investor from Country A investing in Country B will be treated by the government of Country B as if he were an investor from Country A in these aspects11

Lesser degrees of preferential treatment

The foregoing stands in contrast against the lesser degree of preferential treatment accorded to investors in other circumstances, namely applications for entry, sojourn or residence by a foreigner for the purposes of investment ("investment-linked immigration permits"), and the expropriation or nationalization of investments.

In considering applications for investment-linked immigration permits, the LIPPIA only obliges either country to "give sympathetic consideration"12

In the event of an expropriation or nationalization of investments, the standard of treatment to be applied is a "non-discriminatory" one13 Non-discrimination is, in fact, one of four pre-requisites that must be satisfied before an expropriation or nationalization exercise can be carried out14

The other three pre-requisites are:

the exercise must be carried out for a public purpose;

it must be in accordance with due process of law; and

there must be prompt, adequate and effective payment of compensation15

Prohibition against imposition of performance requirements

The most significant aspect of the LIPPIA, however, is the manner in which it prohibits the government of both signatory countries from imposing any performance requirement as a condition for investment activities taking place within their respective territory.

In all, there are 10 circumstances in which quotas or mandatory criteria cannot be imposed16, namely:

Exporting a specified level or percentage of goods or services;

Achieving a specified level or percentage of domestic output;

Purchasing, using or according a preference to goods produced or services provided domestically, or to purchase domestically produced goods or services;

Pegging the volume or value of imports to the volume or value of exports or to the amount of foreign exchange inflows of an investor's investments;

Restricting sales of goods or services produced by an investor's investments by pegging such sales to the volume or value of that investor's exports or foreign exchange earnings;

Appointing individuals of a particular nationality as executives, managers or members of boards of directors;

Transferring technology, production processes or other proprietary knowledge to a specified natural or legal person unless this requirement is imposed or enforced by a court, administrative tribunal or competition authority to rectify an alleged violation of competition laws or such transfer is undertaken in accordance with the Agreement on Trade-Related Aspects of Intellectual Property Rights17;

Locating the global or regional headquarters of an investor within its territory;

Achieving a specified level or value of research and development within its territory; or

Supplying goods produced or services provided by an investor to a regional or global market exclusively from its territory.

Notwithstanding this list, both countries are not precluded from prescribing or continuing to prescribe performance requirements in the latter five categories of activities, if the imposition has the effect of benefiting foreign investors and their investments in the country18.

Such prohibition is unprecedented for both Japan and Vietnam, particularly the latter, which, despite opening its doors towards a more capitalistic market-oriented economy, in 198619, is still regarded as a very tightly controlled market.

Other instances of openness

Besides the foregoing, other pro-investment provisions under the Agreement include the following:

Prompt and hassle-free transfer into and out of each country by foreign investors of investment-related payments such as capital, profits, interests, dividends, royalties, compensation on expatriation, sums in settlement of investment disputes and salaries20;

Greater access to and more prompt publication of laws, regulations, administrative procedures and rulings and judicial decisions of general application and investment-related international agreements21;

Reciprocal recognition of assignment or subrogation of payments to a foreign investor under an investment-related indemnity, guarantee or contract of insurance by the government of the other country or its designated agency;

The establishment of a joint committee to achieve the objectives of the Agreement via discussions and...