The Role of Foreign Direct Investment Policy in the Political Development of the EU

Trade and foreign direct investment (FDI) are the two central, complementary pillars of economic exchange in the world of globalization. Yet they have been treated radically differently in the political and institutional development of European integration. While commercial policy became the core of the single European market and was placed under supranational competence from the outset, by contrast FDI policy was ignored in the 1957 Treaty of Rome and became supranationalized only in the 2009 Lisbon Treaty. What explains these diverging paths of political development for two policies often presented as two sides of the same coin? Using process-tracing based on archival work, the paper explores several explanations for the difference in competence allocation: an economic hypothesis focusing on the initial low importance of foreign investment and its gradual rise in salience through the subsequent decades; a legal hypothesis based on confusion in the original text; and a political hypothesis arguing that FDI was omitted from the treaty on purpose because of the divisiveness of the issue between the Member States and because the design of the European commercial policy mirrored that of GATT, which did not cover investment. We provide a historical institutionalist analysis arguing that the divergence between the political development of trade and investment policies over five decades was based on path dependency, which reinforced an initial distinction made for political reasons. The conclusion of the paper suggests the implications of the allocation of political competence on actual policy outcomes.