Liberalization of foreign direct investment : Europe 1992 and the U.S.-Canada Free Trade Agreement


University of British Columbia

Date Issued


Document Type



Master of Laws - LLM




The recent developments in the European Community evoked by the Single European Act and commonly referred to as the creation of "Fortress Europe" by the end of 1992 have been attracted considerable attention with respect to economic and political integration in the international arena. Similarly, the conclusion of the U.S.-Canada Free Trade Agreement aiming at a loose form of economic integration received significant recognition. These two agreements cover not only liberalization of trade in goods and services but moreover, include foreign direct investment. This is of particular significance since little progress has been made in its regulation on an international level in comparison to the regulation of trade in goods. Due to the fact that direct investment is primarily exercised by large multinational enterprises it has a larger political impact on the host countries than trade in goods and services. Foreign ownership of local industry creates the concern of economic dependence and of a loss of sovereign powers among host governments. Consequently, governments introduce laws and regulations aiming at the restriction of direct investment of foreign investors. However, as foreign investment augments economic growth, it is of common benefit to both investors and host countries to provide an investment climate which balances the conflict of interest between the need of legal certainty and flexibility for foreign investors arid the safeguard of economic independence and political freedom of host country governments to introduce and maintain measures deemed necessary for the benefit of their national economies. This thesis will demonstrate the most effective regime to solve this conflict through comparison of the Free Trade Agreement with the Treaty of Rome as amended by the Single European Act. These agreements have been chosen since they involve two of the triad world economic powers and thus, represent industrialized nations with the highest degree of foreign direct investment aiming at the liberalization of direct investment in their "enlarged" markets. The thesis is divided into three parts. The first and second parts will discuss the degree of liberalization of foreign investment within the Common Market including the progress made under the Single European Act of 1986 and within the free trade area established by the U.S.-Canada Free Trade Agreement in 1989. The analysis will centre around the issues of free establishment of companies, the National Treatment Principle, capital movement, and mergers and acquisitions. The third part consists of the comparative analysis and will provide the final conclusions. The conclusions will show that the two agreements share few similarities but they are characterized by their divergent approach to direct investment liberalization. It is submitted that the more comprehensive form of liberalization is reached in the Common Market due to its broad restraint on sovereign powers of its Member States and coherently implemented elimination of restrictions on foreign investment. In contrast, the Free Trade Agreement only imposes selected obligations on the parties to liberalize direct investment. It will become clear that the Free Trade Agreement stands for a settlement of the most vexing investment issues between the parties rather than a commitment to virtually liberalize investment between the U.S. and Canada. In view of this result, recommendations are made to further liberalize investment under the Free Trade Agreement. These have to be seen, however, in the light of numerous economic and political divergencies between the Common Market and the U.S.- Canadian free trade area.


Investments, Foreign - European Economic Community countries; Investments, Foreign - Canada; Investments, Foreign - United States

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