The Latin American Services Factory for the Asia Pacific Region: Opportunities for the Pacific Alliance
The Pacific Alliance Blog spoke recently to Juan Felipe Toro-Fernandez, our new contributor to the Blog. We interviewed him about his research regarding the extent to which the Framework Agreement in the Pacific Alliance and the Comprehensive and Progressive Agreement for Transpacific Partnership (CPTPP) could become the pathway to developing “The Latin American Services Factory for the Asia Pacific”.Photocredits: Juan Felipe Toro-Fernandez
Mr Toro-Fernandez is a founding partner and the current legal manager of Kesher Business & Investments, a firm specialising in supporting companies in their internationalisation and expansion strategies in Latin America with a focus on the Colombian market. He is also a lecturer at the Law School in Universidad EAFIT and for other universities in Colombia. Mr Toro-Fernandez holds a Master in International Law, Investments, Trade and Arbitration from Universität Heidelberg and Universidad de Chile.
Mr Toro-Fernandez, how did you become interested in the topic of international investments in the Pacific Alliance?
I chose the topic of international investments in the Pacific Alliance because between 2017 and 2018, I carried out a research project that was part of my master’s degree. I titled the thesis “Normative Convergence Between the Pacific Alliance and the Comprehensive and Progressive Agreement for Transpacific Partnership as a Way of Attracting Investments and Promoting Services Chaining with Asia-Pacific: Analysis and Normative Comparison of both Investment Chapters“.
My goal was to compare and survey the investment chapter in the Additional Protocol to the Framework Agreement of the Pacific Alliance (PA) with the investment chapter in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). I wanted to examine convergence opportunities between both regimes to attract investments and promote services linkages (mode 3, commercial presence) with the Asia Pacific region.
I studied both legal regimes accounting for the origins and background of the investment subject and their legal structure. I endeavoured to compare their legal frameworks and address the question of the extent to which these agreements incorporated new generation investment protections for the investors (and the states). I also questioned whether these legal provisions contribute to attract investments and foster productive linkages in the services sectors between the PA and the Asia Pacific region.
I concluded that both investment chapters corresponded, were similar and therefore converged in terms of international investment standards (new generation clauses) such as non-discrimination standards (National Treatment and Most Favoured Nation), absolute standards of protection for the investors (eg, the Minimum Standard of Treatment, Fair and Equitable Treatment, Full Protection and Security), investment protection standards (eg Expropriation, Compensation and the free transfer guarantee), and Investor-State dispute resolution.
I also concluded that the degree of legal harmonisation and convergence achieved through both agreements allows for attracting foreign investments in Latin America and promoting services linkages with the Asia Pacific region.
What does the notion of a Latin American Services Factory for the Asia Pacific entail?
The third chapter of the thesis aims to examine the extent to which both legal regimes — the PA and the CPTPP — allowed for the promotion of services linkages connected with mode 3 of services supply (commercial presence). This idea was presented under a collaboration scheme that I named “the Latin American Services Factory for the Asia-Pacific.”
I understand “the Latin American Services Factory for the Asia-Pacific” as a business conglomerate, business structures linked to one another in an organised manner through horizontal collaboration schemes/networks. These schemes interconnect to provide services to large companies from the Asia Pacific region.
I also envisioned the schemes as an organised gear of small, medium and large enterprises based on all the PA members. These enterprises will supply services to multinational companies throughout all the stages of the supply chain. These enterprises interconnected around the Factory could also receive capital investments from the multinational companies located in the Asia- Pacific countries under vertical schemes.
Finally, I put forward the idea that the “Latin American Services Factory” for the Asia-Pacific would develop as a regional linkage within the PA under a specialisation model where concrete tasks would be allocated throughout the several stages. The Services Factory should promote services supply not only amongst the PA members but also with countries in the Pacific Rim, emphasising the CPTPP members.
Are the Pacific Alliance countries ready to lead a process to structure and develop such Latin American services factory?
I believe that this is the case. By having such a broad regulatory framework, the PA is prepared to lead and advance these productive linkage types between the members. I also maintain that a broad regulatory framework for the PA allows its members attracting investments from companies located in the Asia Pacific region.
This initiative (The Services Factory) becomes an opportunity for achieving the objective in the Framework Agreement of the PA of being a mechanism for permanent political dialogue and economic projection towards the Asia Pacific region. The Services Factory could position itself as a means to integrate the PA members and become the single provider for services to Asian countries interested in the PA markets.
The integration bloc has progressed significantly with the Business Council of the PA. This Council is comprised of the most representative businesses and trade unions of the four members. This is a self-driven initiative from the business sectors to organise themselves for promoting the PA.
I firmly believe this forum could become an important setting to adopt the aforementioned services schemes to foster economic relations with third markets, especially the Asia-Pacific Region.
According to the rules provided in these agreements, what would be the various “modes” for commercial presence that would allow foreign direct investment in Latin America?
I found in the research that the Commercial Protocol of the PA and the CPTPP understood cross border trade of services or cross border supply of services in the same way. This approach meant that only three of the four modes incorporated in the General Agreement for Trade in Services (GATS) — cross border trade, consumption abroad and the presence of natural persons will be covered — in these PTAs. Thus, I questioned whether mode three — commercial presence —was not covered by these agreements at all— AP and the CPTPP. I responded to this query by looking into the investment chapters provided in these two PTAs. The investment chapters incorporated under the definitions the concept of “investment”, referring to the several ways an investment in a state party can occur. Therefore, mode three — commercial presence — was covered as one of the forms of FDI.
As I put forward in this research, this supply mode could occur in several ways allowed for in both agreements. One example of these avenues for FDI includes when an investor of a state party in either the AP or the CPTPP opens representation offices by leasing commercial buildings or commercial premises. Other avenues for FDI occur by incorporating a legal entity such as a trading corporation, subsidiaries, branch offices, or agencies in the territory of another state party.
Finally, I concluded that even though the PA and the CPTPP did not incorporate provisions referring expressly to mode 3 of services supply within their chapters on cross border trade in services in the way GATS does, these PTAs included these provisions in the investment chapters through several avenues.
What did you conclude regarding the scope and degree of convergence between the relevant rules on services and investment in the Pacific Alliance Agreements and the CP-TPP?
My starting points were the rules and disciplines established in the investment chapters of the PA and the CPTPP. I inquired on whether these legal regimes worked harmonically in offering the state parties and investors standard normative frameworks and similar legal structures that would attract investments and productive linkages of services with the Asia-Pacific Region.
I analysed whether the rules and disciplines on investments corresponded with new generation investment rules and whether the rules in these chapters responded to the principles framing both agreements. The analysis concluded that the legal provisions in the investment chapter for the PA and the CPTPP were “coincidentally” similar. Therefore, these legal provisions fully converged in regard to international standards for investments and new generation provisions.
I found that both chapters incorporated the latest and most up-to-date international standards on investments, such as the principle of the sovereign right for host states to regulate specific areas to pursue legitimate public policy’s objectives.
Although I found differences between both legal texts, these differences were not substantive; they were connected to particular drafting styles and did not impact the underscoring principle or subject matter covered in each provision. These divergences did not change the substance of the rules and disciplines on investment. These variations could be considered additional contributions when planning a single legal framework on investment for the PA and the CPTPP.
Finally, I argued that a converging legal framework in the future would aid the goal to attract larger flows of investments from the Asia-Pacific region to Latin America through the several avenues available for FDI that I examined in this research.
If you are interested to know more about Mr Toro-Fernandez’s work about investments and services trade in the Pacific Alliance, please visit our online library featuring several of his academic and opinion pieces about this topic.
You may also reach out to Mr Toro-Fernandez at firstname.lastname@example.org
Mr Toro-Fernandez views in this Blog are personal and do not reflect the policies and views of the institutions he is affiliated with.