[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]




                       INVESTMENT PROTECTIONS IN
                  U.S. TRADE AND INVESTMENT AGREEMENTS

=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 14, 2009

                               __________

                             Serial 111-20

                               __________

         Printed for the use of the Committee on Ways and Means


                      COMMITTEE ON WAYS AND MEANS

                 CHARLES B. RANGEL, New York, Chairman

FORTNEY PETE STARK, California       DAVE CAMP, Michigan
SANDER M. LEVIN, Michigan            WALLY HERGER, California
JIM MCDERMOTT, Washington            SAM JOHNSON, Texas
JOHN LEWIS, Georgia                  KEVIN BRADY, Texas
RICHARD E. NEAL, Massachusetts       PAUL RYAN, Wisconsin
JOHN S. TANNER, Tennessee            ERIC CANTOR, Virginia
XAVIER BECERRA, California           JOHN LINDER, Georgia
LLOYD DOGGETT, Texas                 DEVIN NUNES, California
EARL POMEROY, North Dakota           PATRICK J. TIBERI, Ohio
MIKE THOMPSON, California            GINNY BROWN-WAITE, Florida
JOHN B. LARSON, Connecticut          GEOFF DAVIS, Kentucky
EARL BLUMENAUER, Oregon              DAVID G. REICHERT, Washington
RON KIND, Wisconsin                  CHARLES W. BOUSTANY, JR., 
BILL PASCRELL, JR., New Jersey       Louisiana
SHELLEY BERKLEY, Nevada              DEAN HELLER, Nevada
JOSEPH CROWLEY, New York             PETER J. ROSKAM, Illinois
CHRIS VAN HOLLEN, Maryland
KENDRICK B. MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama
DANNY K. DAVIS, Illinois
BOB ETHERIDGE, North Carolina
LINDA T. SANCHEZ, California
BRIAN HIGGINS, New York
JOHN A. YARMUTH, Kentucky

             Janice Mays, Chief Counsel and Staff Director
                   Jon Traub, Minority Staff Director

                                 ______

                         SUBCOMMITTEE ON TRADE

                  SANDER M. LEVIN, Michigan, Chairman

JOHN S. TANNER, Tennessee            KEVIN BRADY, Texas, Ranking Member
CHRIS VAN HOLLEN, Maryland           GEOFF DAVIS, Kentucky
JIM MCDERMOTT, Washington            DAVID G. REICHERT, Washington
RICHARD E. NEAL, Massachusetts       WALLY HERGER, California
LLOYD DOGGETT, Texas                 DEVIN NUNES, California
EARL POMEROY, North Dakota
BOB ETHERIDGE, North Carolina
LINDA T. SANCHEZ, California

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
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unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.






                            C O N T E N T S

                               __________

                                                                   Page

The advisory of May 07, 2009 announcing the hearing..............     2

                               WITNESSES

Thea M. Lee, Policy Director and Chief International Economist, 
  AFL-CIO........................................................     7
Ambassador Alan P. Larson, Senior International Policy Advisor, 
  Covington & Burling LLP........................................    13
Theodore R. Posner, Partner, International Trade Group, Crowell & 
  Moring.........................................................    22
Robert K. Stumberg Professor of Law and Director of Harrison 
  Institute for Public Law, Georgetown University Law Center.....    34
Linda Menghetti, Vice President, Emergency Committee for American 
  Trade..........................................................    46

                       SUBMISSIONS FOR THE RECORD

Chevron Corporation, Statement...................................    84
Coalition of Service Industries, Statement.......................    86
Kevin P. Gallagher, Statement....................................    89
Linda Menghetti, Statement.......................................    93
Mark Hudson Botsford, Statement..................................   101
Sarah Anderson, Statement........................................   101
Todd Tucker, Statement...........................................   105
U.S. Chamber of Commerce, Statement..............................   116

 
                       INVESTMENT PROTECTIONS IN
                  U.S. TRADE AND INVESTMENT AGREEMENTS

                              ----------                              


                         THURSDAY, MAY 14, 2009

             U.S. House of Representatives,
                       Committee on Ways and Means,
                                     Subcommittee on Trade,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:03 a.m., in 
room 1100, Longworth House Office Building, the Honorable 
Sander M. Levin [Chairman of the Subcommittee] presiding.
    [The advisory of the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                         SUBCOMMITTEE ON TRADE

                                                CONTACT: (202) 225-6649
FOR IMMEDIATE RELEASE
May 07, 2009
TR-2

                   Trade Subcommittee Chairman Levin

             Announces a Hearing on Investment Protections

                in U.S. Trade and Investment Agreements

      
    Ways and Means Trade Subcommittee Chairman Sander M. Levin today 
announced the Trade Subcommittee will hold a hearing on investment 
obligations in U.S. bilateral investment treaties (BITs) and free trade 
agreements (FTAs). The hearing will take place on Thursday, May 14, in 
the main Committee hearing room, 1100 Longworth House Office Building, 
beginning at 10:00 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from the invited witness only. 
However, any individual or organization not scheduled for an oral 
appearance may submit a written statement for consideration by the 
Committee and for inclusion in the printed record of the hearing.
      

FOCUS OF THE HEARING:

      
    The Obama Administration recently announced in the President's 
Trade Policy Agenda that it would ``review the implementation of our 
FTAs and BITs to ensure that they advance the public interest.'' This 
hearing will focus on the investment protections that are included in 
U.S. FTAs and BITs. Those provisions have helped to safeguard 
investments held by U.S. citizens in dozens of foreign countries and 
protect U.S. investors from expropriation without compensation, as well 
as discriminatory and inequitable treatment by foreign governments.
      
    At the same time, concerns have been expressed regarding these 
investment provisions. These concerns include: whether our FTAs and 
BITs give foreign investors in the United States greater rights than 
U.S. investors have under U.S. law; whether the FTAs and BITs give 
governments the ``regulatory and policy space'' needed to protect the 
environment and the public welfare; and whether an investor should have 
the right to submit to arbitration a claim that a host government has 
breached its investment obligations under an FTA or a BIT.
      

BACKGROUND:

      
    The United States is the largest foreign direct investor in the 
world, and also is the largest recipient of foreign direct investment. 
New U.S. direct investment in other countries was $333 billion in 2007 
and $318 billion in 2008. New foreign direct investment in the United 
States was $238 billion in 2007 and $325 billion in 2008.
      
    The United States established its BIT program in 1981, largely 
modeled on European BITs with developing countries that had been in 
place since the late 1950s. Since then, the United States has 
established BITs with 47 countries, and has included investment 
chapters (similar to the provisions in BITs) in its free trade 
agreements. Among other things, FTA investment chapters and BITs 
provide for: ``national treatment'' of investors from the countries 
that are party to the FTA or BIT; limits on the expropriation of 
investments and provisions for the payment of compensation when 
expropriation takes place; a ``minimum standard of treatment'' for 
investors; and the right for an investor to submit an alleged breach of 
the investment provisions of the agreement to international 
arbitration.
      
    Those investment obligations, particularly in the investment 
chapter of the North American Free Trade Agreement (NAFTA), have raised 
concerns in recent years, in particular following a series of 
controversial disputes in investor-State arbitrations at the end of the 
1990s and the beginning of the current decade. (Many of those cases did 
not involve the United States as a party, and, to date, the United 
States has not lost an investor-State arbitration under NAFTA or any 
other FTA or BIT.) Responding to concerns that investment protections 
may have been written too broadly, and that foreign investors in the 
United States may receive more favorable treatment for their NAFTA 
investor-State claims than U.S. investors would under U.S. law, 
Congress in the Trade Act of 2002 mandated several negotiating 
objectives to narrow the scope of investment protection. For example, 
the Act stated that the principal U.S. negotiating objective on foreign 
investment is to reduce or eliminate barriers to investment, ``while 
ensuring that foreign investors in the United States are not accorded 
greater substantive rights with respect to investment protections than 
United States investors in the United States[.]'' The parties to NAFTA 
also adopted a formal interpretation of the ``minimum standard of 
treatment'' provision at this time, to avoid a more expansive reading 
of that provision by arbitrators.
      
    Incorporating congressional objectives, the 2004 model BIT contains 
several changes to past BITs, including narrowing the definition of 
investment covered under the agreement, clarifying the meaning of the 
obligation to provide investors with a ``minimum standard of 
treatment,'' elaborating on the procedures for investor-State dispute 
settlement, and adding articles relating to the relationship between 
the investment obligations and labor and environmental standards.
      
    More recently, in 2007, U.S. FTAs with Colombia, Panama, Peru, and 
South Korea were amended to clarify that ``foreign investors are not 
hereby accorded greater substantive rights with respect to investment 
protections than domestic investors under domestic law where, as in the 
United States, protections of investor rights under domestic law equal 
or exceed those set forth in this Agreement.''
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
for the hearing record must follow the appropriate link on the hearing 
page of the Committee website and complete the informational forms. 
From the Committee homepage, http://waysandmeans.house.gov, select 
``Committee Hearings.'' Select the hearing for which you would like to 
submit, and click on the link entitled, ``Click here to provide a 
submission for the record.'' Once you have followed the online 
instructions, complete all informational forms and click ``submit'' on 
the final page. ATTACH your submission as a Word or WordPerfect 
document, in compliance with the formatting requirements listed below, 
by close of business May 28, 2009. Finally, please note that due to the 
change in House mail policy, the U.S. Capitol Police will refuse 
sealed-package deliveries to all House Office Buildings. For questions, 
or if you encounter technical problems, please call (202) 225-1721.
      

FORMATTING REQUIREMENTS:

      
      The Committee relies on electronic submissions for printing the 
official hearing record. As always, submissions will be included in the 
record according to the discretion of the Committee. The Committee will 
not alter the content of your submission, but we reserve the right to 
format it according to our guidelines. Any submission provided to the 
Committee by a witness, any supplementary materials submitted for the 
printed record, and any written comments in response to a request for 
written comments must conform to the guidelines listed below. Any 
submission or supplementary item not in compliance with these 
guidelines will not be printed, but will be maintained in the Committee 
files for review and use by the Committee.
      
    1. All submissions and supplementary materials must be provided in 
Word or WordPerfect format and MUST NOT exceed a total of 10 pages, 
including attachments. Witnesses and submitters are advised that the 
Committee relies on electronic submissions for printing the official 
hearing record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. All submissions must include a list of all clients, persons, 
and/or organizations on whose behalf the witness appears. A 
supplemental sheet must accompany each submission listing the name, 
company, address, telephone, and fax numbers of each witness.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      
      Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov.

                                 

    Chairman LEVIN. All right, let us start. The rumor is we 
may have unusually early votes, or at least one early vote, so 
let me make a very brief opening statement--and the Ranking 
Member, my colleague, Mr. Brady, will do the same--and see if 
we can at least begin the testimony before the vote. It is not 
certain, but it is likely.
    So, today we are going to take up an important issue 
regarding the investment provisions. My feeling is this, that, 
by definition, trade issues are complex, they are 
controversial. And that is especially true if we believe that 
we both have to expand trade and to shape the content and the 
course of it. I do not think trade is automatically win-win. 
There are ups and downs to most trade issues. And I think that 
is the spirit within which we have to examine all of the key 
issues relating to the expansion of our international trade.
    So, today we are going to focus in, I think, a very 
constructive way, and take a further look on the investment 
provisions that are in U.S. trade agreements and in our 
bilateral investment treaties. As we know, these provisions 
were originally designed to make sure that the investments by 
U.S. citizens overseas were safeguarded, were protected from 
expropriation without compensation and without due 
consideration, and to make sure that there wasn't 
discriminatory or inequitable treatment by foreign governments.
    The question today is whether we have an appropriate 
balance. And issues have been raised--and I think often in a 
constructive way, perhaps sometimes not--about the provisions 
in our FTAs, and whether the provisions today adequately 
articulate what would be called a balanced approach, issues 
like the minimum standards of treatment.
    There were some original provisions in NAFTA, as we know. 
And there then were some changes made a few years ago. The new 
Administration is taking a new look at trade policy, as they 
are at other key issues. And what the Administration has now 
done is to undertake a review of these investment provisions, 
both in our FTAs and in our bilateral investment treaties. And 
it has set up an advisory Committee within the State 
Department. The Advisory Committee on International Economic 
Policy has formed a Subcommittee to review these investment 
issues.
    And we are fortunate today to have the cochairs of this 
Subcommittee, Ambassador Alan Larson and Thea Lee. So, we 
welcome the two of you. I assume you will probably say that you 
are not speaking as cochairs, but individually. But we are glad 
you are both, individuals and cochairs.
    Also testifying today is Georgetown University professor, 
Robert Stumberg--welcome--Linda Menghetti, who is from ECAT, 
and Ted Posner.
    So, we look forward to hearing from all of you. And we will 
hear your testimony after Mr. Brady gives his opening 
statement.
    I think the clock is not working. With 1 minute left, we 
will give you some kind of a signal.
    Also, if I might say, Mr. Brady, that I would like it very 
much if we could be as informal as possible, and each of us 
have Q&A, but see if we can have also some discussion among the 
five of you, because I think we will benefit from that.
    So, welcome. And now, Mr. Brady, your opening remarks.
    Mr. BRADY. Great. Thank you, Chairman Levin, for calling 
the hearing on investment. A hearing is exactly what we need on 
this topic. There is so much misinformation out there about the 
investment protections and our bilateral investment treaties 
and our trade agreements, because the investor mechanism is 
just so easy to demagogue. And, unfortunately, there will 
always be people who reflexively oppose trade. This hearing, 
however, is an opportunity to shine light on the facts and to 
set the record straight.
    First of all, and perhaps most importantly, we don't need 
to fear foreign investment. As we know, it is not simply enough 
to buy American any more, we have to sell American products and 
goods throughout the world. Some of our companies can do that 
from here. Others, to compete, have to compete throughout the 
world.
    According to our Commerce Department, U.S. companies that 
have these foreign operations employ twice as many U.S. workers 
than they do foreign workers. Furthermore, 95 percent of the 
goods and services produced by these companies abroad are sold 
not back here, but rather, in the host or the third country 
jurisdictions. Much has been made of Buy America recently, but 
U.S. investment abroad allows us to Sell America, which is what 
it will take for the United States to lead the world out of the 
global economic crisis.
    The following point is perhaps already evident, but it 
needs to be highlighted. The United States is the party 
insisting on legal and procedural protection for outbound U.S. 
involvement. U.S. bilateral investment treaties and investment 
chapters in our bilateral and regional free trade agreements 
benefit our guys. We demand these provisions because they 
safeguard U.S. investments in foreign countries by shielding 
the investments from expropriation without compensation, as 
well as from discriminatory and equitable treatment by foreign 
governments.
    Put another way, the core purpose of these legal 
instruments is to raise the level of investment and property 
rights protections in foreign jurisdictions to the level of 
protection that already exists here, in the United States.
    The investor-state mechanism is designed to accomplish the 
same fundamental goal. It is meant to raise, for U.S. investors 
abroad, the level of protection--in this case, dispute 
settlement and due process rights--that exist for the equal 
benefit of domestic and foreign investors here, in the United 
States. In fact, investor-state mechanism is often credited 
with helping to instill the rule of law in developing 
countries.
    In a sense, the investor-state mechanism allows the United 
States to export our Constitutional procedural due process 
standard to our trading partners. I have no problem with that. 
But I am sure we will hear today the investor-state mechanism 
exposes the United States to an endless stream of costly, 
frivolous, and invasive arbitration brought by foreigners.
    Well, I have looked into the allegations, and here is what 
my research shows. The investor-state mechanism has existed in 
U.S. bilateral investment treaties since the very first ones we 
entered in, in the early 1980s. It has been around for a 
quarter century, and it has never been used against the United 
States. We have never been forced to defend a single law, 
regulation, or administrative action in a bilateral investment 
treaty investor-state dispute. In the handful of cases that 
foreign investors have brought under NAFTA, we have not, to 
date, lost or settled, on unfavorable terms, one single case.
    You don't need to take my word for it. Consider this 
excerpt from the summer 2008 issue of the Harvard Journal on 
Legislation, ``The United States has never lost a single dollar 
in investor-state dispute under NAFTA or under any other trade 
agreement or bilateral investment treaty.'' The author, our 
Chairman of the Ways and Means Committee, Charles Rangel.
    The last point I will make is that the provision the U.S.--
investment chapters of our free trade agreements have evolved 
over the years. I am eager to hear the testimony on this point, 
because the evolution of the provision, it seems to me, has 
been in direct response to the criticism raised.
    Changes and clarifications that were made to our investment 
language include provisions to require the panels consider the 
same U.S. Supreme Court factors that U.S. courts consider when 
determining whether there has been an expropriation of 
property; provisions to allow panels to dismiss frivolous 
claims at an early stage of the proceeding; and provisions that 
clarify that environmental and other public welfare regulations 
are presumed not to constitute indirect expropriations.
    Furthermore, the landmark May 10th deal added language in 
our pending free trade agreements with Colombia, Panama, and 
South Korea, that foreign investors are not accorded greater 
substantive rights with respect to investment protections than 
domestic investors under domestic laws, here in the U.S.
    These changes, taken together, strike me as a compromise 
that aims for the right balance between the interest of U.S. 
regulators, on the one hand, and U.S. investment abroad on the 
other.
    I welcome all the witnesses this morning, and look forward 
to your testimony. Mr. Chairman, I yield back.
    Chairman LEVIN. Thank you. Right in 5 minutes. So, why 
don't we go down the line? I am not sure of the protocol, so we 
will use how you are seated. So, Thea Lee, if you would begin, 
and we look forward to your testimony.
    All of your testimonies will be in the record. So deal with 
your five minutes or so as you would like. And, again, welcome 
to all of you. Thank you for coming. This is really an 
important hearing on an important issue that needs to be 
discussed.
    Ms. Lee.

     STATEMENT OF THEA MEI LEE, POLICY DIRECTOR AND CHIEF 
                INTERNATIONAL ECONOMIST, AFL-CIO

    Ms. LEE. Thank you so much, Mr. Chairman. Thank you, Mr. 
Brady. Members of the Subcommittee, good morning. I appreciate 
the opportunity to come speak to you today on behalf of AFL-
CIO's 11 million working men and women on this important issue.
    As you all know, trade and investment issues are enormously 
important to America's working families. They impact our jobs, 
our wages, our unions, and the government regulations that we 
count on to keep our communities healthy, and to safeguard our 
rights. Of course, these rules also affect workers and the 
environment in other countries. Our ultimate goal is to reform 
these rules in a way that strengthens democratic procedures, 
improves transparency, and protects workers and the 
environment, both here and abroad.
    Of course, we understand that we are in a global economy, 
and we will continue to be in a global economy. The question 
really is whether the investment rules that we put in place can 
be made fairer and more balanced, so that they serve the 
interests of my members, among others.
    We have had a longstanding concern over the investment 
provisions included in U.S. bilateral investment treaties and 
in trade agreements. We understand and support the importance 
of protecting the rights of investors, but we also believe that 
the existing investment provisions in U.S. investment and trade 
agreements are imbalanced in two crucial aspects.
    It's worth remembering that the origin of these rules was, 
as Mr. Brady said, to protect outward foreign direct 
investment--generally in small, developing countries--in the 
bilateral investment treaties. It is not clear that they were 
designed to be a two-way street, where they could be used with 
major industrialized countries, like Canada, with big 
corporations that had presence in both countries being able to 
use them in the United States, as well as for U.S. investors, 
as they have an outward interest, as well.
    That is one of the key issues: whether these provisions 
continue to be appropriate, given how they have evolved and how 
their use has spread now into bilateral free trade agreements, 
as well as possibly investment treaties with large countries 
like China, where there may be particular concerns.
    The first problem that we see is that these agreements 
significantly enhance the rights of investors vis a vis 
governments, but they fail to establish commensurate 
responsibilities for investors, particularly with respect to 
worker rights and the environment.
    The second problem is that they give substantive rights and 
procedural advantages to foreign investors that are not 
available to domestic investors. This raises the possibility 
that investment tribunals can be used to circumvent the 
democratic process, and to achieve de-regulatory outcomes in a 
secretive and inaccessible forum.
    Certainly the experience that we have had with the 
investment chapter of the North American Free Trade Agreement 
and current bilateral investment treaties reinforces these 
concerns, both in the inward and the outward direction. We have 
two kinds of concerns with the investment provisions--the 
democracy and good governance concerns as well as job concerns. 
I just wanted to take a minute to talk about why, from the 
labor movement's point of view, these issues are important to 
us.
    The investment protections are designed to enhance the 
security of foreign direct investment, and address investors' 
concerns with respect to unstable or corrupt governments where 
production may be located. In this sense, these provisions are 
a critical element in the trade agreements that we have 
negotiated over the last decade-and-a-half.
    The tariff reductions that we negotiate are paired with 
enhanced security of investment and upward harmonization of 
domestic laws to prevent overly intrusive regulation of foreign 
investment. But this combination both facilitates and 
accelerates the offshoring of American jobs, precisely because, 
for the most part, there has been no commensurate set of 
investment obligations.
    My fellow witness, Alan Larson, and I have been asked to 
cochair a subcommittee of the State Department's Advisory 
Committee on International Economic Policy, as Chairman Levin 
said, so that we can review the draft model and present our 
conclusions to the Advisory Committee on International Economic 
Policy. We are looking forward to a constructive dialog with a 
diverse and representative group, and we hope that the 
Subcommittee will be able to take a fresh look at this issue 
and work toward consensus on how to move this discussion 
forward.
    Our key areas of concern include the investor-state dispute 
resolution mechanism, the failure to distinguish between 
legitimate regulatory action on the part of government and 
indirect expropriation, the overly broad definition of 
investment, the potential impact of these investment provisions 
on needed future national and global financial regulation 
efforts, and the need to establish commensurate and enforceable 
responsibilities for investors with respect to workers' rights 
and the environment.
    Let me thank and congratulate the Subcommittee for holding 
this hearing today. It is both timely and relevant. We hope 
this will be only the first step in a more comprehensive review 
of U.S. trade and investment policy aimed at supporting the 
creation of good jobs at home and abroad, and laying a 
foundation for sustainable democratic and equitable 
development.
    Thank you very much, and I look forward to your questions.
    [The statement of Ms. Lee follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    Chairman LEVIN. Gee, you did this in exactly 5 minutes.
    Ambassador.

   STATEMENT OF ALAN P. LARSON, SENIOR INTERNATIONAL POLICY 
                ADVISOR, COVINGTON & BURLING LLP

    Mr. LARSON. I will try to do as well. Chairman Levin, 
Ranking Member Brady, and Members of the Subcommittee on trade, 
my name is Alan Larson. I am an economist, a senior 
international policy advisor at Covington & Burling, and a 
former under secretary of state for economics under the 
Administrations of George W. Bush and William Clinton.
    International investment plays an essential role in 
sustaining the economic health of the United States. Inbound 
investment puts foreign capital to work in our countries, 
supporting output and jobs. It also bridges the gap between our 
low national savings rate and our large investment needs.
    During the recent global, financial, and economic crisis, 
international investors have made investments in troubled U.S. 
companies, including in financial services firms and automobile 
companies, that have been very, very valuable to our economic 
strength.
    Outbound investment also is valuable. It opens access to 
and increases supplies of critical raw materials. It also 
provides channels through which a substantial share of U.S. 
exports flow.
    International agreements help provide a stable and 
predictable legal and regulatory environment for international 
investment. Bilateral investment treaties, for example, provide 
assurance of non-discriminatory treatment, specifically most 
favored nation treatment and national treatment, subject to 
clearly specified exceptions. They also provide a minimum 
standard of treatment grounded in customary international law. 
This standard is expressed in the concept of fair and equitable 
treatment.
    Investment treaties limit the circumstances under which a 
host government can expropriate an investor's property. And, if 
an expropriation does occur, they require prompt, adequate, and 
effective compensation. The expropriation clause of bilateral 
investment treaties is modeled closely on the takings clause of 
the United States Constitution.
    The BITs also provide investor-state dispute settlement 
through international arbitration. The model BIT that is used 
as the template for launching negotiations with a new partner 
has periodically been reviewed and revised, with the last 
review taking place in 2004.
    I am honored to be serving, along with Thea Lee, as cochair 
of a private sector advisory panel that will contribute input 
to the Administration's review of the model bilateral 
investment treaty. As you said, Mr. Chairman, our report will 
go to the Advisory Committee on International Economic Policy, 
which itself is a private sector advisory Committee established 
under FACA.
    Thea and I intend to assemble a panel of private sector 
experts with a variety of points of view that can inform our 
deliberations and inform the report that we will provide for 
ACIP. This report, I understand, will be part of a broader 
outreach process on the part of the government that could 
include such things as public hearings and a notice and comment 
process.
    For the purposes of our panel, I expect we will want to 
look at the experience of the United States with international 
investment agreements, we will want to consider the role that 
these agreements play in the new economic circumstances our 
country now finds itself in, and will want to consider whether 
we have recommendations on how these agreements--agreements I 
consider to be very, very good agreements--could be made even 
better. Thank you, Mr. Chairman.
    [The statement of Mr. Larson follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Chairman LEVIN. Thank you very much.
    Mr. Posner, welcome. You have been in this room before. 
Welcome.

 STATEMENT OF THEODORE R. POSNER, PARTNER, INTERNATIONAL TRADE 
                    GROUP, CROWELL & MORING

    Mr. POSNER. Indeed, I have. And it is very good to be back. 
And I thank you, Mr. Chairman, and Ranking Member Brady and 
Members of the Subcommittee, for the opportunity to testify 
today. My name is Ted Posner, and I am a partner in the 
international trade and international arbitration groups at the 
law firm of Crowell & Moring.
    Prior to my return to private practice at the beginning of 
this year, I had the good fortune to work on the law and policy 
of international investment, both in the congress and in the 
executive branch, including as your trade counsel, Chairman 
Levin, then as trade counsel to the Senate Finance Committee, 
where I was deeply engaged in drafting the investment-related 
provisions of the Bipartisan Trade Promotion Authority Act of 
2002, and then, as an attorney in the Office of the U.S. Trade 
Representative, where I participated in most of the 
negotiations under the 2002 framework, as well as in the 2004 
revision of the model Bilateral Investment Treaty, to which 
Ambassador Larson alluded a moment ago.
    Today I want to make three points. First, investment 
protections in bilateral investment treaties and free trade 
agreements, together with the availability of a neutral forum 
in which to assert those protections, provide an essential set 
of rights to U.S. persons doing business in a globalized 
economy. They facilitate precisely the kind of economic 
activity we should be encouraging in our efforts to reverse the 
economic downturn.
    Second, a sustainable international investment policy 
requires a balancing of interests. As Chairman Levin said in 
his opening remarks, the question of the day is, ``Have we 
achieved that appropriate balance?'' I contend that that 
balance was achieved in the Trade Act of 2002, and that no 
development since then warrants a disrupting of that balance.
    And, finally, I want to note that discussions of this topic 
frequently have been muddied by misunderstandings of what BITs 
and FTAs require of host governments, and what they don't 
require. And I would like to clarify a few of those 
misunderstandings.
    To appreciate the value of investment treaties and 
agreements, it is useful to consider the situation that a U.S. 
investor faces in a foreign country in the absence of such 
instruments. As a practical matter, in the absence of treaty 
protections or domestic legislation providing for international 
remedies, that investor can rely only on the rights afforded by 
the domestic law of the host country. Often those rights will 
not be easily accessible to an outsider.
    And to defend its rights, the investor's only recourse 
usually will be the local court system, which will require the 
investor to be familiar not only with local substantive law, 
but also with all of the technical aspects of local procedural 
law and customs.
    If that fails, the investor may seek the assistance of the 
U.S. Government, in which case its interests will be competing 
with diplomatic, national security, and other interests. And, 
if the investor is doing business in multiple countries, its 
familiarity with its legal rights in one will give it no 
comfort in others.
    A treaty or agreement changes all of that. It puts the 
relationship between the United States investor and the host 
country on an international law footing. Now, the investor is 
protected not only by the domestic laws of the host, but also 
by a set of rights that is common across multiple countries. 
And that investor is able to assert those rights before a 
neutral tribunal under rules that will vary only slightly from 
agreement to agreement.
    By facilitating investment in this way, investment 
protections serve as an engine of economic growth. Critics of 
this view say that it gives undue weight to the interest of 
companies doing business abroad, while giving insufficient 
weight to the interest of investors and consumers in the U.S. 
market.
    The treaty obligations the United States negotiates are 
reciprocal. Critics argue that more attention should be paid to 
how those obligations constrain the United States, as host to 
foreign investment. In fact, there was a very vigorous debate 
on this very issue during the drafting of the Trade Act of 
2002, when I was serving as counsel to the Senate Finance 
Committee. The outcome of that debate was a balancing of the 
interests of the United States as both exporter and importer of 
investment.
    The 2002 Act calls on negotiators to pursue investment 
protections, similar to those contained in earlier treaties and 
agreements, but the Act also takes account of U.S. defensive 
interest in several notable respects, including the well-known 
``no greater substantive rights'' objective, standards with 
respect to expropriation that Ambassador Larson alluded to 
earlier, a transparent dispute settlement process--and a 
dispute settlement process, I would add, that is to include 
mechanisms to deter the filing of frivolous claims.
    The message of the 2002 Trade Act was heard loudly and 
clearly. The agreements we have negotiated since then have 
adhered closely to those objectives. And with respect to the 
question of the day, ``Should that balance achieved in 2002 be 
adjusted or disrupted in some way?'' I would respectfully 
submit that the answer is no. As I have said, no developments 
in the intervening 7 years suggest any reason to dispense with 
the balance reflected there.
    I would also say, as a former negotiator, that changing 
those objectives, and trying to impose new obligations on our 
foreign counterparts will be a substantial challenge, perhaps 
an insurmountable one, leaving U.S. investors without the 
protections that their foreign competitors receive under other 
countries' BITs and FTAs.
    I will leave it at that, Mr. Chairman. I see my time is up. 
I would refer to my written testimony with respect to some of 
the misunderstandings about obligations under BITs and FTAs I 
referred to earlier. Thank you.
    [The statement of Mr. Posner follows:]

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    Chairman LEVIN. Professor, if you take five, and, Ms. 
Menghetti, if you take five, then we will go and vote and we 
will come back.
    Professor, your 5 minutes.

STATEMENT OF ROBERT K. STUMBERG, PROFESSOR OF LAW AND DIRECTOR 
OF THE HARRISON INSTITUTE FOR PUBLIC LAW, GEORGETOWN UNIVERSITY 
                           LAW CENTER

    Mr. STUMBERG. Good morning, Mr. Chairman. Congressman 
Brady, if I may begin with your introduction to the issue, I 
agree that U.S. negotiators have struck a balance between the 
twin mandates, on the one hand to protect the interests of 
American investors abroad, and on the other hand, to assure 
that no greater rights go to foreign investors.
    I also agree that the language of the most recent 
agreements reflects that kind of compromise. Because it is a 
compromise, my view is that the United States has not achieved 
the goal of no greater rights, and I would like to make three 
points to explain why.
    First, I would like to talk about the change in countries 
with which we are negotiating, and raise the question as to 
whether one size fits all. That is to say, does one model for 
an investment agreement work in every case?
    The free trade agreement with Australia shows that one size 
need not fit all, because both countries agreed in that 
agreement that investor-state arbitration was not necessary. 
Why? Because both countries had functioning courts, and because 
both countries have cross-investments in each other which, if 
there were investor rights, might cause a risk of investor-
state litigation.
    Korea--an agreement that is on the table which may soon 
come to this congress--sounds a lot like Australia. It is a 
country in which there is lots of investment going both ways. 
And both American and Korean courts work. So why is investor-
state arbitration part of a proposed free trade agreement with 
Korea?
    Another agreement that is on the table--Panama--raises 
interesting questions because the government of Panama, through 
a variety of banking tax and regulatory policies, is recruiting 
companies to place, their corporate domicile in Panama to 
escape taxation or regulation in their home country. Panama has 
a creative and aggressive legal industry that has recruited, to 
date, over 350,000 foreign companies to establish a domicile in 
Panama.
    So, essentially what you have is a country that has 
embarked on a strategy of attracting the kind of companies that 
would, if they could, use investor-state arbitration if their 
interests are affected by policy in the United States.
    Last year, the United States also began negotiations on a 
bilateral investment treaty with China. Those negotiations are 
now suspended. China is interesting, just because of its size. 
Presently, there is only about a billion of Chinese foreign 
direct investment in the United States.
    But, as you all know, China has accumulated a humongous 
surplus in trade with the United States, and at some point is 
going to start reinvesting that money in more profitable 
investments. And there is a lot of pressure for China to follow 
the successful investment path of Japan, which was in a similar 
position.
    If China does so, and starts moving billions into the 
American economy, it is likely to buy assets or shares in 
American companies that implement its distribution chain. So, 
for example, that might look like companies like Wal-Mart or 
Target or Sears, icons of American retail commerce.
    If you are thinking long term, anticipating that within 30 
or so years the Chinese economy is projected to be about the 
same size as the U.S. economy, you can anticipate that so-
called American companies could have the benefits of investor-
state arbitration. So, a big chunk of the economy could opt out 
of U.S. courts if they wanted to, and instead look to the 
investor benefits.
    Let me conclude by referring to a case that is now active, 
and it is rumored to be very close to a decision, the Glamis 
Gold case against the United States. It allows me to illustrate 
the issue of investor rights with respect to two questions.
    First, who is a foreign investor? The Glamis Gold company 
started as a Canadian company with mines in Canada. It then 
sold its Canadian assets and established subsidiaries in the 
United States. Now its holdings are in the United States, 
Mexico, Honduras, and Guatemala. So, it essentially is a 
binational company that is able to take advantage of the free 
trade agreement to bring its claim against the United States.
    The big issue is the minimum standard of treatment. And the 
big question there is whether a change in the reclamation 
standards adopted by the State of California amounts to a 
violation of the agreement.
    The United States Department of State argues that a change 
in the law does not violate the agreement, because the recent 
language, assuring that there are no greater rights, says that 
it is not a denial of justice for the law to change. Glamis, on 
the other hand, argues that there are plenty of NAFTA cases it 
can cite to show that the standard of minimum treatment can 
evolve, and should assure a stable regulatory environment, 
which means the government has a duty not to change the law, 
once a company like them has a mining claim in effect.
    What this shows, in conclusion, is that these agreements 
allow for a narrow interpretation--one which is argued by the 
U.S. State Department, in its brief--or, they are 
interpretations that allow for a broad reading of the minimum 
standard of treatment.
    This is the fundamental ambiguity that exists also with 
respect to protections from expropriation and protections with 
respect to national treatment.
    [The statement of Mr. Stumberg follows:]

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    Chairman LEVIN. Thank you very much. Ms. Menghetti? I think 
the bell will ring when we have 5 minutes left. So even though 
the clock is not working, the bells are.

    STATEMENT OF LINDA MENGHETTI, VICE PRESIDENT, EMERGENCY 
                  COMMITTEE FOR AMERICAN TRADE

    Ms. MENGHETTI. Thank you, Mr. Chairman. Congressman Brady, 
Members of the Subcommittee, thank you for the opportunity to 
appear before you today on behalf of the Emergency Committee 
for American Trade, ECAT, an association of the chief 
executives of leading U.S.-based business organizations with 
global operations.
    Let us make no mistake. U.S. investment overseas is 
squarely in the U.S. economic and our broader national 
interest. With 95 percent of the world's consumers and 80 
percent of world purchasing power outside the United States, 
U.S. industries need to be fully engaged internationally to 
remain competitive. U.S. investment overseas largely 
complements U.S. activities here at home. It is not a 
substitute for them.
    U.S. companies that invest abroad export more. They expend 
more on research and development here, in the United States, 
and they pay their U.S. workers 24 percent more than purely 
domestic companies. In order to secure these benefits, the 
United States has long undertaken a program to protect 
investors who oftentimes find themselves in jurisdictions with 
weak rules and/or weak court systems.
    The modern version of this program is the BIT and trade 
agreement system. The investment protections in these 
international instruments are based on core principles of U.S. 
law, from the Takings, Equal Protection, and Due Process 
Clauses of our Constitution, to the protection against 
arbitrary and capricious government action in the 
Administrative Procedure Act.
    U.S. investors have relied upon these provisions to 
successfully address foreign government action that is 
discriminatory, expropriatary, or otherwise violative of core 
principles. They have won cases under a number of U.S. BITs, 
including with Argentina, Ecuador, Poland, and Turkey, and 
under NAFTA in cases with Canada and Mexico.
    Such provisions are now more important than ever, 
particularly as some countries, including those in our own 
hemisphere, are turning their backs on basic international 
obligations and rules of fairness. And they are equally vital 
as we look to the negotiations with India and China. For U.S. 
companies to be able to penetrate those markets successfully, 
we need these types of instruments to address the unfair and 
discriminatory barriers that we find in those markets.
    In many more instances, cases are never filed, as these 
clear rules promote the amicable resolution of disputes.
    The United States has been a defendant in only a small 
number of cases. Where decisions have been issued, the United 
States has prevailed on the merits in decisions that reflect 
the high standards for which these arbitration panels are well 
known. And there has been no onslaught of cases, as some 
claimed might happen. About 50 cases have been filed in the 
past 14 years of NAFTA, overall. This is less than a third of 
the cases filed every year in U.S. court on federal Takings 
claims alone.
    Between 2001 and 2004, the U.S. Government engaged in an 
extensive review of the previous 1994 model BIT, and considered 
the same issues that we are discussing today. The outcome, the 
2004 model BIT, represented a substantial change from the 
earlier model. And, unfortunately, it narrowed and weakened 
some of the protections for U.S. investors overseas. Notably, 
these provisions have not been tested, as no case has been 
decided on the substantially changed new model.
    The proposals that are being discussed here today raise 
some very serious concerns for U.S. industries investing 
overseas. Further incorporating the no greater rights language, 
for example, would reverse decades of U.S. support for strong 
and binding international rules that largely benefit the United 
States and its investors. Such an approach would have little 
effect on challenges to the United States, since these 
investment protections are already largely consistent with U.S. 
laws and jurisprudence. And, at the direction of Congress, the 
2004 model BIT moved the United States to even greater 
conformity.
    While the benefit for the United States as a potential 
defendant is, at best, minimal, the risk for U.S. companies is 
great. Other countries will insist on relegating U.S. investors 
to local standards, negating the purpose of the BITs, and 
subjecting investors to weak and sometimes corrupt legal 
systems.
    On regulatory issues, let us be clear. Investment rules 
simply do not prohibit the bona fide nondiscriminatory 
application of legitimate regulation. And none of the NAFTA 
cases demonstrate otherwise.
    I urge you to reject proposals to embrace blanket 
exceptions for government actions to protect the environment 
and public welfare. The United States itself does not impose 
such exceptions in the Administrative Procedure Act, in the 
Takings clause, in the Equal Protection, or in our other legal 
principles. To establish such a safe harbor would allow foreign 
governments to expropriate U.S. property to the detriment of 
U.S. companies and their workers.
    U.S. leadership is essential to promote a stronger 
international investment climate to benefit the U.S. economy, 
U.S. companies, and U.S. workers. ECAT looks forward to working 
with this Committee and the Administration to achieve that 
objective. Thank you.
    [The statement of Ms. Menghetti follows:]

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    Chairman LEVIN. All right, thank you very, very much. 
Unfortunately, as you know, everything is unplanned around 
here, at most. We have five votes. And one of them is going to 
be a longer vote.
    So, be patient with us. I think we may take the materials 
that we have and read them while we have votes, so we will come 
back with even sharper questions.
    So, thank you. Your testimony has been really excellent. We 
will be back. It will be a half-an-hour, I think, anyway. Maybe 
longer.
    [Recess.]
    Chairman LEVIN. Let us reassemble. I will not apologize, 
because I do not want to apologize for congressional 
procedures. But as soon as Mr. Brady arrives--several of my 
colleagues told me that they were rearranging their schedules. 
This was not expected, these five votes.
    So, we will just wait for Mr. Brady. And others will filter 
in again. We very much appreciate your patience.
    [Recess.]
    Chairman LEVIN. Okay. So, we will start and others will 
join us. As we ask questions, let me urge that, to the extent 
we can, that we focus less on direct foreign investment, the 
need for it, because it is here to stay, in some degree--in 
major degree--and more on the structure of investment and how 
we handle the issues that arise from it.
    And the number of issues--and, by the way, as we know, the 
rules have changed in the last years. It isn't as if we are 
dealing today with the precise language of a number of years 
ago. And so, I think if we can focus in on the structural 
issues, the important ones, it will be helpful. And a number of 
those issues have been raised. And let me just kind of quickly 
touch on them. And then maybe some of you pick them out and 
comment.
    Issues have been raised about the transparency of these 
tribunals. Issues have been raised about one-size-fits-all. And 
I think, more and more, we have understood that one size 
doesn't fit all. And issues have been raised, you know, why 
Australia and not Korea, in terms of exclusion of that 
provision.
    Also, an issue has been raised about subsidiaries. As we 
have more and more a globalized economy, there are going to be 
more and more subsidiaries of American-based companies. And 
what should be done about that?
    And also, as we discuss this, let me just remind us that, 
as I said, there have been changes. And in recent agreements, 
there has been--this is a total surprise. All right, let us go 
on for--what is happening is we now have a controversial issue 
on the floor. Enough said.
    You know, in recent documents, there has been included the 
provision, ``Except in rare circumstances, non-discriminatory 
regulatory actions by a party that are designed and applied to 
protect legitimate public welfare objectives, such as public 
health, safety, and the environment, do not constitute indirect 
appropriations.'' That is relatively new language.
    Plus, the language that some of you have referred to, 
``Foreign investors are not hereby accorded greater substantive 
rights,'' and I won't read the rest of it, because I think you 
know.
    So, pick out any of those issues. You have varying points 
of view. Take your pick, and help inform us. Shall we go down 
the row? Ms. Lee, do you want to pick out any one of the five 
that have varying positions to them? Yes?
    Ms. LEE. Sure. And let me say that I think there has been 
movement in the right direction: in the 2002 Trade Act; and in 
the 2007 agreement that was reached around the trade 
agreements, we are moving in the right direction.
    Let me just say one thing briefly, then let my colleagues 
come in, on the preambular language in the May 2007 deal that 
is in the Peru and other pending trade agreements that asserts 
that there shall be no greater substantive rights for foreign 
investors.
    My question is whether that is sufficient, to state in the 
preamble that there are no greater substantive rights when you 
have the language, which is very different. Both the procedures 
and the substance of the investment rights remain different 
from what is available to domestic investors.
    Just on the face of it, having the ability to use investor-
state dispute resolution is a greater right than what a 
domestic investor would have. And so, on the face of it, unless 
we pull that back pretty substantially, that is a greater 
right, and it's in conflict with the preambular language.
    I am not a legal scholar, but I have been trying to read up 
on all these issues, in terms of the definition of minimum 
standard of treatment and indirect expropriation. It seems to 
me that the investment language in international agreements 
still does not comport exactly with the takings language in 
U.S. law, and that you have a decision that is made by a 
different group. The final decision is not looked at by U.S. 
courts, it is looked at by these international arbitral groups 
that do not have the same familiarity with U.S. law, or the 
same history, and so on.
    And so, on the face of it, I still think we are at a place 
where we continue to have both substantive and procedural 
issues that afford greater rights, whether we state that they 
shouldn't or not. And that is what I hope we can look at, going 
forward.
    Chairman LEVIN. Ambassador, why don't you take a pick, any 
of those issues or any other issue?
    Mr. LARSON. Could I say one sentence about two or three of 
them?
    Chairman LEVIN. Sure.
    Mr. LARSON. Okay. On transparency, as the chairman of the 
U.S. chapter of Transparency International, I think it is very 
important, and I appreciate the fact that there are two 
extensive clauses in here about transparency. I hope we can see 
whether those are adequate.
    On annex B, I know from the research that Thea Lee and I 
will hear from people who think it doesn't go far enough and 
people who think that it has gone too far. And so that is going 
to be an interesting part of the work of the panel that she and 
I will be working on together.
    The last comment I would offer is, Mr. Chairman, on your 
last point about no greater substantive rights. I mean, I think 
the challenge for U.S. negotiators is that in many--for U.S. 
foreign investors in other jurisdictions, we want to obtain 
greater substantive rights for our investors than domestic 
investors may have in those countries. That is sort of the 
value of the BIT.
    We understand, as negotiators, that we would generally want 
to offer as little as possible, in terms of, you know, the 
substantive benefits that foreign investors might get under a 
BIT here. But there is clearly a tradeoff between what we want 
for our investors in some of the jurisdictions, and what we 
want to give up, in terms of rights for foreign investors in 
our country.
    Chairman LEVIN. Let me just have a quick conference. So, we 
have one vote. Why don't we do this? Mr. Brady, why don't you 
take over, and I will go--if you don't mind--and I will have 
the staff take down your question and the answers. And you kind 
of take over for 5 minutes. I will come back, and why don't you 
now go and vote, and then you will be next when you come back. 
Okay? So, if you--is that okay with you?
    Mr. BRADY. No, that is great.
    Chairman LEVIN. Okay. And our staff will take down your 
question, and also the answer.
    Mr. BRADY. Can I pass some legislation while you are away?
    [Laughter.]
    Chairman LEVIN. I think someone would call for a quorum, I 
think.
    Mr. BRADY. Thanks Chairman, very much. Thank you. And, 
again, I think this panel--I will be quick. Thanks, Chairman.
    I wanted to visit a little about, one, I think the panel's 
points have been really well made. I want to focus a little on 
the benefits and the improvements that have been made in these 
provisions over the years.
    And if we could, look at the slide panel up there, sort of 
focusing first on what Ms. Menghetti had to say about the 
importance of us selling American products and services 
throughout the world. Ninety-five percent of the consumers live 
outside the United States. Selling--those sales are a huge part 
of our economy.
    This investment provision, in various forms, has been put 
in place now for more than a quarter of a century. The purpose 
is to protect our investments overseas. Some of our companies 
can export from here. But if we want a Hewlett Packard to 
compete with computers around the world--Procter and Gamble 
with home products, Coca Cola with their beverages--they often 
times have to compete in that region to either produce or 
service or maintain their market share.
    And the investment option has been a protection we have 
insisted upon to make sure that in countries that we are in, 
where their judicial system perhaps isn't as mature as ours, 
their investment property protections aren't as strong as the 
United States'. We've wanted to make sure our investors have 
the option to pull out and go to that dispute resolution 
process, that arbitration process. Again, a panel that both 
parties agree upon, a panel that creates consistent--a legal 
framework to resolve these issues.
    What we find is that the U.S. has used this successfully 
throughout the years to resolve disputes. California-based 
Metalclad successfully used NAFTA to challenge issues in 
Mexico. S.D. Meyers, from Ohio, the same with Canada. We have 
had U.S. companies challenge bilateral investment trade issues 
in Poland to our benefit, Motorola in Turkey, Occidental in 
Ecuador, CMS and Sempra in Argentina, all again using this 
provision to protect U.S. investors.
    But if you look at the number of foreign investors who have 
used this process to successfully challenge the U.S., you will 
see a blank piece of paper, because it hasn't been done. They 
have brought no lawsuits under bilateral investment treaties, 
none under our bilateral FTAs, and 15 to 17 under the NAFTA 
provision.
    One of the reasons is because, for a foreign investor, the 
use of going to the arbitration is somewhat redundant, in that 
they have very strong protections already in the U.S. law and 
Constitution. And when they do challenge it, what they find is, 
again, the U.S. provisions from takings to due process and 
transparency issues all incorporated in that dispute resolution 
process, all of which has helped us.
    So, Ms. Menghetti, do you--the belief that this works 
against U.S. interests, do you find that to be a credible 
argument?
    Ms. MENGHETTI. Congressman Brady, I do not find that to be 
a credible argument.
    In the NAFTA cases that have gone forward--and there 
haven't been that many of them, as I said, compared to what 
happens every year in a very small area of U.S. jurisprudence--
but in all the NAFTA cases, you know, folks might be able to 
say, ``I don't like this one statement that the panel said 
here,'' or, ``This one statement that they said there.'' But in 
all the cases that were decided for investors, if a U.S. court 
were considering that case, the investor too would have won, 
and that is because the principles in these treaties are very 
close to--and, frankly, based on--the principles we have in our 
own jurisprudence.
    In 2004, the model BIT was revised substantially, and in 
some ways made things worse, I would argue, for U.S. investors 
overseas. And we incorporated--and I can't think of any other 
international agreement that does this--we incorporated 
directly language from the leading Supreme Court case on 
indirect expropriation into the text of our expropriation 
annex.
    Mr. BRADY. Yes.
    Ms. MENGHETTI. The problem, I think, for U.S. investors is 
really we don't have enough of these instruments. There are 
over 2,000 bilateral investment treaties worldwide. The United 
States is party to about 40 of them, and about 15 more with 
countries through our FTAs.
    There are treaties with China between Germany and the 
Netherlands that have investor-state and strong protections 
against expropriation. Our companies don't have that. Many OECD 
countries have investment treaties with Korea that have 
investor-state. If, as was proposed, we took out investor-state 
from our FTA with Korea, our investors, our businesses, our 
economy, and our workers would be the worse off.
    Mr. BRADY. So it is a competitiveness issue, as well?
    Ms. MENGHETTI. Absolutely, it is a competitiveness issue.
    Mr. BRADY. And that, you know, there has been a concern 
raised over the years that this provision could be used to 
challenge, you know, state and local environmental regulations. 
But you know, improvements in this--one, that hasn't happened.
    Ms. MENGHETTI. That has not happened.
    Mr. BRADY. Successfully. But, two, I get the impression 
that improvements made in 2002 in the Trade Act, and then again 
in the May 10th provisions are now parts of our Peru, Panama, 
Colombia, and South Korea free trade agreements.
    Mr. Posner, you talked about how those improvements have 
taken what is, at its basics, a way to export our 
Constitutional protections, and improve even greater upon it 
over the years. Can you expound?
    You are always looking for ways to improve provisions in 
trade agreements. Have we seen improvements, and have they been 
good for us?
    Mr. POSNER. Well, I think we have seen improvement, to the 
extent that you had a debate on the appropriate balance between 
protecting the interests of U.S. investors seeking to do 
business overseas, and the so-called defensive interests, 
taking account of the risk that the United States might be sued 
with respect to a regulatory action.
    So, I see where we are today as an improvement over, say, 
where we were in 1982, in the sense that we have now had that 
debate and achieved that balance.
    In terms of how would any of the improvements that we have 
made be interpreted by a panel, what would happen if you had a 
case that raised, say, an indirect expropriation and the panel 
had to interpret the annex that a number of people have 
referred to, how would it do it? What would the conclusion be? 
It is hard to say, because we haven't had that case yet.
    So, all we can do at this point is make best guesses, based 
on what I think was our good lawyering, frankly, and our best 
efforts to accurately reflect the balance that was articulated 
in the 2002 Act. And I think we have done that. So, in that 
sense, in coming from where we were in 1982, when this program 
really got going, to where we are today, yes, I think we have 
improved because we are more balanced.
    Mr. BRADY. Thank you, Mr. Posner. Ambassador, there is a 
concern that foreign investors could use this provision to 
challenge our state and local environmental laws. Yet we have 
seen states like California--very aggressive on environmental 
issues, whether it is clean air, toxic pits clean-up, Water 
Quality Control Act, health and safety code laws, just in the 
last--well, just in the last number of years, again, aggressive 
in environmental actions--unchallenged by foreign investors, 
probably more heavily challenged by U.S. domestic companies 
that have a different view of it.
    Do you see the improvements that have been made over the 
years as eliminating or restricting greatly the possibility 
that that could occur successfully?
    Mr. LARSON. Mr. Brady, I was in government at the time that 
the 2002 Trade Act was enacted. And the 2004 changes in the 
model BIT were made, and so obviously I was a part of that. And 
I agreed that they represented a good balance.
    I have been out of government since then. And I know, from 
the preparation that I have done, along with my colleague, Thea 
Lee, that there have--continue to be concerns expressed about 
this issue. There have been concerns expressed on both sides of 
it, frankly.
    And so, I am certain that this will be a part of the 
deliberative process that we will be co-chairing. I am going to 
be very interested in hearing the respective views that get 
expressed. I am going to not express a view of my own, since I 
will be co-chairing the process----
    Mr. BRADY. Yes.
    Mr. LARSON [continuing]. Except to say that, you know, it 
is public record that I was a part of the process that brought 
us to where we ended up in 2004.
    Mr. BRADY. Thank you, Ambassador. And, Chairman, I will run 
and vote.
    Chairman LEVIN. Okay.
    Mr. BRADY. Thank you.
    Chairman LEVIN. Thank you very much. Mr. Doggett is 
recognized.
    Mr. DOGGETT. Thank you, Mr. Chairman. I have been raising 
concerns about investment provisions in our foreign trade 
agreements. I believe, first, in this Committee in 2001. Modest 
improvements have been made, but I think your decision to 
conduct this hearing is constructive, and each of the witnesses 
has offered constructive testimony looking at this.
    I can say, first, what I agree with. I agree with Mr. Brady 
fully in his opening statement that our goal is to help bring 
other countries up to American standards. Our goal, however, 
should not be to give foreigners more rights than Americans 
have. And simply putting it in the preamble, as Ms. Lee noted, 
is constructive, and a big change, but it may not be 
sufficient, by itself.
    I think that there are several issues the witnesses have 
touched on that I will, as time permits, explore. One is the 
decision of when it is that we decide we need to use these 
investor panels to protect investment interest. As you noted in 
your comments, Mr. Chairman, the question of whether we will 
have foreign investment here or American investment abroad, 
that is not at issue. I support that concept fully. It is a 
question of how that investment impacts the ability of states 
and localities and the Federal Government to provide meaningful 
protection to the environment, to health and safety.
    So, the first question that has to be asked, I think--and I 
don't believe that USTR has had any real set of guidelines 
about how to do this--is whether you need any investment 
agreement or not, or whether, as we determined with Australia, 
that their courts are adequate to handle this.
    There is, for an example, the decision to include investor 
panels for Korea. There is a body of case law in this country 
on forum non conveniens that Korea provides, through its 
judicial system, an adequate forum. And, therefore, cases have 
been dismissed that would be brought here, because it's 
maintained that Korea, through its court system, provides an 
adequate system.
    Now, if I were a trade lawyer, and I had the choice of 
going to a Korean court or going to a panel of other trade 
lawyers who that day, instead of being advocates, were 
arbitrators, I think I would clearly prefer the arbitrator 
panel. But that doesn't mean that's what is in the best 
interest of the American public.
    And so, looking at the way USTR determines whether to have 
an investment agreement, and whether we have adequate and clear 
standards as to whether they make that decision, is one very 
important decision.
    I think that the changes that have been made in some of the 
agreements that are now being relied on as a reason not to do 
any more are there because a few of us raised these complaints 
about the lack of transparency. There is some progress that has 
been made there. But we need to put those rights to make them 
meaningful.
    And the fact that the United States has yet to have a 
ruling against it, I think has to be considered against the 
backdrop of the fact that the trade lawyers who are the 
arbitrators in these panels are well aware of what the impact 
would be if the United States did lose a major decision.
    Having raised some of those points, let me begin, Professor 
Stumberg, by asking you about the issue of Panama. I am pleased 
that, from this witness stand, Secretary Geithner endorsed the 
legislation that Carl Levin and I have to stop tax havens. And 
my concern is that not only are taxpayers being fleeced by 
corporations who buy a mailbox in Panama or some other sandy 
beach country, but I am also concerned about how the 
subsidiaries of American corporations can be used to launch an 
assault on decisions that are made by a state legislature.
    You and others have suggested that these investment 
provisions could easily be manipulated to use foreign 
subsidiaries to gain rights that the American corporation 
wouldn't have if it simply brought a case directly in Federal 
court here. Why should we be concerned about this type of forum 
shopping by multi-nationals who don't want to file a claim in 
an American Federal court? And is this already happening? And 
is there any particular concern when it comes to Panama?
    Mr. STUMBERG. Perhaps it would be helpful to not talk so 
much theory, but to take an example. Panama is controversial 
because of its banking law, the degree of anonymity or secrecy 
that financial institutions or investment banks or hedge funds 
can maintain in Panama, versus the United States.
    So, your concern about subsidiaries is best understood when 
you think about the corporate structures of companies that the 
U.S. Government cares about. Most of the big banks and 
financial institutions that are involved in the current 
financial crisis, and who are sometimes benefiting, sometimes 
not benefiting from the bail-out measures, are U.S. companies 
with domiciles in the United States, and they also have 
subsidiaries in Panama, which they manage for accounting, tax, 
and other investment purposes.
    There is an interesting and disturbing arbitration decision 
related to financial services that came out of the Czech 
Republic just 2 years ago, the Saluka case. In the late 1990s, 
the Czech Republic was coping with a crisis of toxic assets. 
Ironically, the toxic assets were the result of banks shifting 
out of the control of a Communist state economy.
    The government was forced with either letting some 
institutions fail, or bailing them out sufficient to maintain 
stability in the system. The Czech government bailed out the 
so-called Big Four, under the theory that they were too big to 
fail. Those happened to be the four banks in which the Czech 
government held the biggest equity stake. Sound familiar?
    A bank that was operating in Czechoslovakia, domiciled in 
The Netherlands, and owned by a Japanese holding company, took 
advantage of the BIT between the Czech Republic and The 
Netherlands. It brought a claim focusing on the minimum 
standard of treatment, which includes fair and equitable 
treatment.
    When all was said and done, the ruling was that the Czech 
Republic had violated the minimum standard. Its argument that 
the bail-outs were a prudential measure, because the banks that 
it bailed out were too big to fail, was not a sufficient 
objective. It was not a sufficient rationale for explaining why 
it was helping those banks and not the bank owned by the Dutch 
institution and the Japanese holding company.
    The arbitrators ruled against the Czech government, and the 
amount actually is still in question. The latest I heard was 
that they were seeking in the range of 3.6 billion crowns. I 
haven't converted what a Czech crown is, compared to a euro or 
a dollar.
    That's a real case, and it shows you that subsidiary 
structures matter. The companies can legally strategize to take 
advantage of BITs and free trade agreements, and the financial 
service sector is a huge and looming issue, because many 
investors and many institutions were virtually wiped out. Why 
do some get the bail-out and some don't?
    Chairman LEVIN. Okay. Your time is up. Let me suggest this, 
that we move on. And, Mr. McDermott, you are next, I think.
    Dr. MCDERMOTT. Thank you.
    Chairman LEVIN. But before--if you don't mind, if--when I 
went down the row, I skipped three, Mr. Posner, Professor 
Stumberg, and Ms. Menghetti.
    Ms. Menghetti--if you don't mind, Mr. McDermott--you want 
to take 30 seconds, just on this issue, and then we will come 
back to you?
    Ms. MENGHETTI. I----
    Chairman LEVIN. Just so we have some back and forth.
    Ms. MENGHETTI. Absolutely, Mr. Chairman. I don't know the 
precise terms of that treaty--which was not a U.S. BIT, right? 
I do know that our BIT has very strong requirements, and denial 
of benefits under Article 17 requiring substantial business 
activity for the plaintiff in one of these cases. I would have 
to look into this other bit a lot further. I don't believe that 
that type of scenario can happen here.
    Two other quick points, though----
    Chairman LEVIN. Okay, let me suggest this. I don't want to 
take too much of Mr. McDermott's time right now.
    We will come back to that, okay? So you have more--I just 
wanted you to have a little time to have some back and forth. 
So my colleague and friend, Mr. McDermott----
    Dr. MCDERMOTT. And I assume, Mr. Chairman, too, you are 
welcome--and I would like to hear her other two points. Since 
we don't have time for them right now, they can supplement in 
writing so that we will have that.
    Chairman LEVIN. Absolutely, absolutely.
    Dr. MCDERMOTT. Thank you.
    Chairman LEVIN. We are going to see how long you can go and 
how long we can go. And there may be another vote interrupting 
us, because this is a controversial issue before us. It's the 
supplemental.
    So, Mr. McDermott, you are next.
    Dr. MCDERMOTT. Thank you, Mr. Chairman, I guess, for having 
a chance to ask questions.
    I would like to ask the panel. Is it right to assume that 
only investors have a private right of action? Mr. Posner.
    Mr. POSNER. Yes, there are certain threshold questions in 
investor-state dispute settlement. To be a claimant, to 
actually be able to bring a claim to arbitration, you have to 
be an investor of a Party. You have to have an investment in 
the territory of the other Party. Or, in some cases, we have 
what's known as pre-establishment rights.
    So, if you sought to make an investment, you made every 
effort, but you were kept out of the market because of 
discriminatory treatment on the part of the other government, 
you might be able to bring a claim with respect to that pre-
establishment phase.
    But the short answer to your question is, yes, you have to 
be an investor or somebody who is seeking to make an 
investment, and is being blocked in order to go to arbitration.
    Dr. MCDERMOTT. Ms. Lee.
    Ms. LEE. I think that is a very important question, and I 
would disagree that it is obvious on the face of it that only 
investors should have private right of action.
    If you look at the trade agreements, investors have a 
privilege that no other group--not a union, not a non-
governmental organization--has, to challenge whether the other 
party to the agreement is living up to its obligations or not.
    We have talked a lot about whether unions, for example, 
should have the right to sue another government if it is not in 
compliance with a labor chapter, and whether we would have the 
opportunity to bypass our own government, so that we wouldn't 
have to convince our government to bring that case. Everything 
but the investment language in the trade agreement is 
adjudicated on a government-to-government basis.
    I think it creates a huge imbalance in the trade 
agreements, certainly, if you give one group, private 
investors, the right to sue. Even in the context of the 
bilateral investment treaties, it creates an imbalance between 
private companies and governments. Governments have an 
obligation to protect the interests of their citizens. They 
have a democratic process for determining the level of 
regulation, whether it's public health or the environment.
    To give an individual company the right to sue and to 
create a tax liability when it is successful is an enormous 
step, and one that I think should be rethought.
    Ms. MENGHETTI. Congressman McDermott.
    Dr. MCDERMOTT. Yes?
    Ms. MENGHETTI. If I could just make one--two points about 
that, one is an investor should not be thought of as a 
business. So, an organization that goes overseas and opens an 
office for other purposes and invests capital in that country 
could be an investor.
    And the other point I would make is it is very interesting 
that investor-state dispute settlement--we see it under our 
BITs, now our FTAs--we also see it in agreements that--say the 
World Wildlife Fund, an environmental, non-government 
organization has with foreign governments in tropical timber 
conservation, where there is a debt swap, and the governments 
make certain commitments. Those international--those 
environmental organizations have sought precisely these rights 
in those areas, as well.
    And so, it's not something, I think, just confined to 
businesses. But investors, the reason you have investor-state 
as opposed to any other parts of a broader FTA is the investor 
is overseas. They are subjecting themselves to a foreign 
government's activities and actions. No other actor, if you're 
not an investor, is put in the same place.
    Dr. MCDERMOTT. The reason I asked the question is that I 
remember--we have been going around and around on this issue 
for some period of time. And the most classic case was--or that 
I remember--was the gasoline additive produced by a Canadian 
company that--and which they sued the State of California for 
their law that said they couldn't have it any more. And they 
won.
    And are we in that same place? Did they not win?
    Ms. MENGHETTI. The U.S. Government won that case, the 
Methanex case.
    Dr. MCDERMOTT. And the Canadian firm----
    Ms. MENGHETTI. The Canadian firm lost. And in fact, the 
Canadian firm had to pay damages to the U.S. Government.
    Dr. MCDERMOTT. And who was it that gave the evidence? Did 
they just defend the right of California to protect the common 
good?
    Ms. MENGHETTI. I believe it was the Department of State's, 
the Legal Advisor's Office, which did the defense.
    Mr. POSNER. That's right. In any of these cases, whether it 
involves a measure of the U.S. Federal Government, or a state 
government, or a local government, it is the United States, and 
in particular the Legal Advisor's office within the Department 
of State, that defends the measures.
    I could elaborate on that more, but it goes to a point that 
I think Mr. Brady alluded to earlier, which is that when you go 
to arbitration, the only remedy you can seek is damages, money 
damages. So it is not as if, in the Methanex case, to use that 
as an example, the Canadian investor in that case could have 
sought to compel California to do something that it didn't want 
to otherwise do, in the interest of regulating on behalf of the 
consumers of California. The most that Methanex could have 
gotten, if it had won, which it did not, was money damages from 
the U.S. Government.
    Dr. MCDERMOTT. And that same thing, then, could be 
happening with our bail-out money to banks. If there is some 
creative lawyers in some countries, we may wind up, our $700 
billion bail-out of our banks--Mr. Stumberg.
    Ms. MENGHETTI. I think that's not the case. I mean, in 
2004, one of the very big innovations put into our model BIT 
was this prudential carve-out--that governments have the right 
to take measures, precisely financial measures, if they need 
to, for prudential reasons.
    The bail-out that we have seen, the TARP, has not been 
discriminatory. I don't see any allegation that it has come 
close to violating anything our government has committed to.
    Mr. STUMBERG. The question about the prudential carve-out 
was raised in Ambassador Kirk's confirmation hearing. It's a 
two-sentence exception. The first sentence says nothing in the 
agreement should stop a government from taking prudential 
measures. The second sentence says that governments may not 
take advantage of the exception, if to do so would avoid their 
obligations under the agreement. It appears to be self-
canceling. Or, perhaps it creates a burden of proof in favor of 
the investor and against the government.
    That is the kind of question I am trying to raise to your 
attention, where I am not arguing that there shouldn't be 
investor protections. I am saying that these are very complex 
agreements. We learn as we go. And every time we anticipate a 
new factual scenario, we should take advantage of it. We should 
be prudent and manage future risk, and do things like tighten 
the screws on that prudential exception.
    If you want a good model for one, go back to NAFTA. NAFTA 
has a one-sentence prudential exception, and it says, 
``Governments may take prudential measures, and that will not 
be a violation of this agreement.''
    There are hundreds of billions of losses, as you know, in 
the U.S. financial markets, and there is a great deal of de 
facto unintentional picking and choosing going on between 
institutions. We have no idea what the potential upside of our 
liabilities are, in that respect.
    Chairman LEVIN. Mr. McDermott, I think we will turn it over 
to Mr. Etheridge, and then we can come back. Mr. Etheridge.
    Mr. ETHERIDGE. Mr. Chairman, thank you. And let me thank 
you all for spending the time here this morning. I know it has 
been a long morning, and I appreciate it.
    Mr. Posner, let me ask you a question, since you have--as 
someone who has worked at the corporate level, as well as 
having been staff level, you have a little bit more of a unique 
perspective--and then I will ask the others to comment.
    And my question is, are there specific changes that you 
would recommend to our FTAs and BITs that would provide legal 
certainty, and facilitate investment that would help provide 
economic growth to American companies, companies here in the 
United States?
    Mr. POSNER. I think that the short answer is no. I think 
what you have in our current model is a core set of protections 
that Ambassador Larson alluded to earlier.
    When the U.S. investor goes overseas, sets up shop in the 
territory of another country, really these are the main 
protections. This is the essence of what it's looking for in 
its relationship with that other country. It wants to know that 
it won't be discriminated against. It wants to know that if its 
property is taken, that it will be compensated promptly, 
effectively, and adequately. It wants to know that it will be 
entitled to a certain minimum standard of treatment.
    So I think those core elements have been there since 1982. 
They continue to be there. What we have done in the intervening 
27 years is to make certain adjustments, I would say, at the 
margins to start to take into account the fact that, as we 
enter into these agreements with bigger economies--with 
economies that are making investments in the United States, 
there is a possibility we might be sued. And there has been 
more thought given to how we would respond to that.
    So, the short answer to your question, Mr. Etheridge, is 
no, I can't think of any change that I would make.
    I would, if I can sort of just tack on one sentence in 
response to Professor Stumberg's point, with respect to the 
prudential exception for financial services, in fact, it is not 
a one-sentence exception. There is an entire page that sets out 
a special procedure where financial regulators of the two 
countries that are Parties get together and work through these 
issues, the same way they would if there were a complaint made 
with respect to a tax measure.
    So if a country were challenging a tax measure of the 
United States or Peru or Chile, or whatever other country, and 
said that's expropriatary, there would actually be a dialog 
that takes place between taxing authorities to sort that issue 
out before you even ever got to a panel.
    It is the same with prudential measures. So it illustrates 
the point, I think, that we have a good balance. I can't think 
of anything that I would change, because I think if you did you 
would move in one direction or the other, and that would really 
disrupt the balance and crater the program.
    Mr. ETHERIDGE. Anyone else?
    Mr. STUMBERG. Sure, if I could respond. Hopefully there is 
always that kind of dialog in investor-state disputes. The 
procedures require the parties to try to get together and work 
out a pragmatic solution first.
    In this case, what the investment chapter requires is that 
that dialog must include the taxing authorities, or the 
prudential authorities of the country. If they don't agree, 
then the case still goes forward to an arbitration panel.
    So, Ted is right to point out the fact that there is built-
in dialog here. But it is part and parcel of the usual process. 
It is just much more explicit.
    Mr. ETHERIDGE. Ms. Lee.
    Ms. LEE. Mr. Etheridge, in answer to your question about 
whether there are any reforms, there is a short list on page 
five of Professor Stumberg's testimony, that I think is a good 
summary of the areas that you would want to look into. There 
are some suggestions for how to narrow some of the definitions 
and the standards, and clarify where the language is unclear, 
where the language has been interpreted differently by 
different dispute panels over the years. We have put ourselves 
in a vulnerable position, where we are hoping that the dispute 
panel will decide in a certain direction, and that they will 
take one tack over another. When we have something as important 
as this issue, which affects both the United States, as well as 
the outward investment and unions and our brothers and sisters 
in developing countries, we should narrow the language so it 
says exactly what we want it to, and we won't have this problem 
with differing interpretations, or hoping for the best out of a 
dispute panel, because we will have clarified that language.
    Mr. ETHERIDGE. Mr. Larson.
    Mr. LARSON. Very briefly, I tend to the view that these 
issues have been though through very, very carefully. So I 
don't want to give the impression that what we have now has--is 
necessarily bad. I do think that we have been assigned to have 
a look and see if it can be made better. We need to do that.
    One area that certainly is different today, looks different 
today than it did five years ago, is financial services, and 
the whole issue of safety and soundness. And you can look at it 
from two perspectives. One is there is more regulation and more 
attention on what governments ought to do to ensure safety and 
soundness of institutions. That is for sure. There is also a 
very clear recognition, I think, that investment from abroad 
has been a very important contributor to the ability of our 
financial system to respond to the crisis that we've faced over 
the last 2 years.
    So, we have work to do. I just don't have a pre-conceived 
answer to your question.
    Ms. MENGHETTI. If I might, I tend to agree with my 
colleague, Mr. Posner, that we don't need to see new 
improvements. I am happy to discuss them, I think they always 
should be discussed. I am quite alarmed, in fact, by the 
proposals made at the end of Professor Stumberg's testimony, 
which I have just been looking at. And with the Committee's 
permission, I would probably like to submit something for the 
record on those.
    What I think we really need is more of these treaties. 
There are over 2,000 of these BITs around the world. The United 
States is party to about 40, and about 15--with 15 countries in 
our FTAs. The United Kingdom, Germany, others have very strong 
BITs, and they have them with countries like Korea, with 
investor-state. Germany and The Netherlands have a BIT with 
China that has strong expropriation standards and investor-
states. Our companies, our economy, and our workers are losing 
the competitive battle with the lack of more BITs that we don't 
have.
    Mr. ETHERIDGE. Thank you, Mr. Chairman. I yield back.
    Chairman LEVIN. Mr. Pomeroy.
    Mr. POMEROY. Mr. Chairman, thank you for this hearing. And 
I apologize for missing so much of it, in light of conflicts 
that I just simply couldn't avoid.
    The inquiry, I believe, is so extremely important, because 
this notion that the way we have been doing trade is the way we 
will do trade going forward, bring on the next trade deal, 
would be a very erroneous notion, relative to the feeling 
across the country, and certainly the feeling in this congress.
    And so, essentially, this kind of inquiry--where are the 
soft spots in the trade deals, how do we make certain that 
legitimate questions that people have about the wisdom of what 
we've done are being addressed, and how can we make sure we 
don't repeat errors going forward, all of this is extremely 
important inquiry.
    Having missed virtually the entire hearing, I am not going 
to ask questions that have probably been covered already. I 
will continue to review the statements and, again, appreciate 
very much your leadership on this panel. And I hope, with the 
spirit of bipartisan accord, we can continue this type of 
inquiry. I think it is very, very important to the institution 
we represent on trade. Thank you.
    Chairman LEVIN. Well, thank you. Let me just ask--do you 
have a few more minutes? I mean, you have been very patient. 
Are you willing?
    I think the importance of this subject, and also the spirit 
expressed by Mr. Pomeroy, which I think you know is very much 
mine, makes it, I think, useful if we spend a few more minutes. 
Okay?
    Kevin, Mr. Brady, do you have anything further?
    Mr. BRADY. Sure. Just again, I--Chairman, thanks for 
holding this hearing. I do think it's important for us to be 
looking for ways to improve issues.
    This provision has proven to be very helpful to our ability 
to sell U.S. products overseas, to sell our services. And it 
has been, I think, critical in attracting investment. Just like 
a company, you would rather be one that people want to invest 
in than a country (sic) you don't. And this has been critical 
in attracting investment that supports five million U.S. jobs--
also critical.
    I want to address a couple of points that have been raised 
very thoughtfully by our Members. One is the concern that in 
Panama, or in any place, that some shell company could locate 
there, and then bring a cause of action against their or U.S. 
law.
    Up on the screen is the language from the Panama trade 
promotion agreement that deals with the issue. And, basically, 
it says to the point if the enterprise has no substantial 
business activities in that territory, other than just owning 
or controlling, that their benefits may be denied under this 
chapter. In other words, the shell company, I guess, could file 
a claim, but not very likely to succeed.
    There has been concerns, perhaps, a foreign company could 
locate in the U.S., again, use a shell company or otherwise, 
and challenge our U.S. environmental, state, and local 
environmental regulations but also--again, because of 
improvements to the provision language in our agreements and 
investment treaties--say ``except in rare circumstances, non-
discriminatory regulatory actions by party that are designed 
and applied to protect legitimate public welfare objectives, 
such as public health, safety, and the environment do not 
constitute indirect expropriations.''
    Again, we took efforts and actions to limit the likelihood 
that that would occur. So I think some of these issues have 
been addressed, and have proven to be good improvements to this 
provision.
    But I wanted to ask Mr. Posner, I guess, because you raised 
it in testimony. You talked about the balance that, as we 
provide and seek greater protections for our ability to sell 
American products throughout the world. That reciprocity 
exists, so you have to weigh that balance against the rights 
that are provided in a reciprocal trade agreement.
    Can you talk--since you were so instrumental in 2002 
improvements--can you talk a little about that? Because I 
actually think that is an area we don't spend much time 
thinking about in this provision.
    Mr. POSNER. Sure. Going back to 2001, 2002, you had started 
to see more and more claims against the United States under 
NAFTA. You saw the Methanex claim that Congressman McDermott 
alluded to earlier. There was a claim involving an 
infrastructure project in Massachusetts. There was the Loewen 
case, the so-called Mississippi funeral homes case. So you had 
a number of cases which caused observers of these agreements to 
think more carefully about what happens when the United States 
is sued. Are we adequately protected?
    In response to that concern, we did a number of things. One 
is with respect to expropriation, and the annex that some 
people have referred to. There was a concern that an investor-
state arbitration tribunal might interpret the concept of 
expropriation in a more expansive way than a U.S. court would 
interpret the concept, the parallel concept, of takings.
    To ensure that that did not happen--as Ms. Menghetti 
referred to--we created this annex. And in drafting that annex, 
what we did was we went back to the seminal Supreme Court cases 
in the area of regulatory takings, the famous Penn Central case 
which many are familiar with----
    Mr. BRADY. Yes.
    Mr. POSNER [continuing]. We looked at the factors that the 
U.S. Supreme Court and lower courts looked to in determining 
whether a regulatory action constitutes a taking. We drew on 
those principles, and put them into the annex. So I think that 
was one very important thing that we did.
    We also were mindful of the fact that, in a sense, there is 
a connection between the risk of being sued and transparency. 
We thought if the process is more transparent, stakeholders 
will become familiar and more comfortable with it. They won't 
see this as some star chamber that is deciding things in an 
untoward way. We insisted upon transparency. That has now 
become a cornerstone of our investor-state processes.
    There was also a question back in 2001 about the meaning of 
the so-called minimum standard of treatment. In particular, 
there was a concern that an arbitration panel would take a 
concept like fair and equitable treatment, and say, ``Well, 
that is an entirely subjective concept, a standardless concept. 
I can decide--I, as arbitrator--can decide what it means.''
    There is a concept in the world of international 
arbitration that goes by the Latin term ex aequo et bono, that 
an arbitrator can decide based on what it thinks is fair. And 
there was a concern that panels would take that provision in 
U.S. treaties and interpret it in that way.
    So, we closed that door by saying, ``No, you interpret that 
concept in accordance with the customary international law of 
minimum standard of treatment.'' And there is a very well-
developed law, over a century old, on what that concept means.
    Those were the main features that we put in there in 
recognition of precisely the concerns that you have identified. 
Thank you.
    Chairman LEVIN. Okay. I think----
    Mr. BRADY. And, Chairman, the only point in asking that 
last question was that I think it is important to keep 
improving our agreements at every shot, but also it's important 
not to sort of fall to the temptation that everything before us 
is bad. There have been good improvements in this provision 
that we ought to embrace as we work forward. Thank you.
    Chairman LEVIN. Okay. And then, as I turn to colleagues, 
language that we know regarding shell is there.
    I think an issue has been raised here--and perhaps the 
subcommittee will consider this--where the entity in another 
country is not a shell. And this is going to occur more and 
more during globalization, right, where you have a subsidiary 
that isn't a shell, but a real thing. And I think the question 
becomes does that subsidiary--which, let's assume is a true 
subsidiary, it doesn't call all the shots, you know, et cetera, 
et cetera--would it have access to an arbitration panel which 
would not be true otherwise, of its home corporation?
    That is a different issue, is it not, than--Ted, Mr. 
Posner, do you want to----
    Mr. POSNER. Yes. I will just say briefly, first of all, the 
denial of benefits article, which Congressman Brady has 
distributed and put up on the screen, that's one half of the 
picture. So you can't--a mere shell could not bring a case 
against the United States. We all agree on that.
    Your question, Mr. Chairman--if it had substantial business 
activity in the other country, could it bring a claim? And the 
answer is, yes, if it's bringing a claim with respect to an 
investment that it has made in the United States.
    So, if you had a situation--take a big U.S. corporation 
that establishes a small subsidiary in Panama or some other 
country. The mere fact of its having substantial business 
activity in the territory of that other country is not enough 
for it to bring just any claim against the United States. It 
would have to bring a claim with respect to an investment that 
it owns in the United States, that it, the foreign subsidiary 
owns. That's a pretty high bar.
    The prospect of a company arranging its business dealings 
on the possibility that one day it might want to bring a claim 
against the United States with respect to an investment that 
the subsidiary owns in the United States I find rather 
implausible.
    Chairman LEVIN. Yes, Professor Stumberg, and then I will 
turn to my colleagues. Yes?
    Mr. STUMBERG. Well, Ted----
    Chairman LEVIN. By the way, this is why we are having this 
hearing, to raise these issues and have the responses. 
Professor, take a minute, and then I will turn it to one of my 
colleagues.
    Mr. STUMBERG. Well, to my colleague, Mr. Posner, I would 
say the law school I went to taught me that one of the lawyer's 
chief roles is to help one's corporate clients structure their 
operations, to create an architecture that takes advantage of a 
complex array of legal features: tax law, corporate law, 
environmental and economic regulation.
    The State of Delaware is a living monument in the United 
States to the legal imagination, and how frequently lawyers do, 
in fact, help their clients structure the architecture of which 
subsidiary is incorporated where, to take advantage of legal 
opportunities.
    Ms. MENGHETTI. One----
    Chairman LEVIN. At this point--is there an example, I 
guess?
    Ms. MENGHETTI. Could I----
    Chairman LEVIN. Yes?
    Ms. MENGHETTI. I was going to suggest the example is this. 
We have an over 20-year-old bilateral investment treaty with 
Panama. We have never seen this case. We have never seen that 
type of structuring that Ms. Posner described would have to 
happen to come within the treaty----
    Chairman LEVIN. How about other places than Panama? Has 
that happened?
    Ms. MENGHETTI. Not against the United States, it hasn't. 
And that is probably, in significant part, because the United 
States has such a good legal system.
    Chairman LEVIN. All right, Mr. Doggett, you are next.
    Mr. DOGGETT. Thank you very much, Mr. Chairman. Ambassador 
Larson, the Joint Committee you have seems to me to be a 
constructive step forward in trying to address some of the 
concerns that I have, even though we may have a somewhat 
different perspective about how far-reaching those are.
    Do you have a feeling at this point as to when you will 
have any kind of report that a Committee might benefit from?
    Mr. LARSON. Not as specific, Congressman, as I would like 
to be able to give you today. Ms. Lee and I had a conversation 
in the last couple of days with representatives of the 
government, USTR and the State Department. We--I think we have 
collectively agreed that she and I and the government need to 
sit down and map out the next steps. We want to hear those 
issues that the executive branch thinks are very high on their 
list. We have heard a lot out of the conversation today, and I 
would like to thank the chairman for the opportunity to, you 
know, get this input to our work.
    One of the things we have to talk about is time table. I 
know that there is a hope that this could be expeditious, but 
we also know that these are thorny issues, and----
    Mr. DOGGETT. And I suppose it doesn't have to be all at 
once. You may resolve some issues without resolving all issues.
    And so, hearing from you, I would just say it would be 
constructive--the kind of conversation from the differing 
perspectives that you and Ms. Lee have in addressing these 
issues is very much the kind of conversation that I think the 
chairman is facilitating in this committee for the first time, 
not just the first time today, but trying to get a discussion 
of what a more modern trade policy would look like.
    And I would ask you, Ms. Lee, as you do that, to look at 
this issue of when it's appropriate, as a preliminary matter, 
to have an investor tribunal of this type. It is appropriate, 
in some circumstances. Despite the questions that I have about 
it, I would hate to be investing in some countries if I had to 
rely just on their local courts.
    But I think that USTR in the past, under Democratic and 
Republican Administrations, has had a tendency to just listen 
to whoever might have a business claim there, the fraternity of 
trade lawyers, and not consider the broader issues. And I think 
we need to look at the forum non conveniens law, and at other 
considerations, to determine what is appropriate.
    Ms. Menghetti, I hope you will give a full critique of what 
Professor Stumberg is talking about, because I can see issues 
with some of these, and some of them are somewhat appealing to 
me, as ways to try to address this.
    And I want to ask you, Professor Stumberg, about one of 
those. I know there was a time in this country--in fact, it 
concerned President Roosevelt a great deal--that, you know, it 
was viewed as a taking of a company's profits if you had a 
child labor law, or if you set minimum standards for how many 
hours a week someone had to work. No one is suggesting that 
we're going back to those kind of conditions on those issues, 
but the decisions of the courts of the 1930s and the 1920s, and 
substantive due process are very different, though there are, 
certainly, jurists in recent times who have urged that point of 
view.
    What does it mean to say that you believe we should follow 
the position of the U.S. brief in Glamis, with reference to 
minimum standard?
    Mr. STUMBERG. Well, it's about due process. There are two 
flavors of due process, going back to the Supreme Court cases 
before 1934. One flavor, which is alive and robust today, is 
procedural due process, the basic ideas of fairness in courts 
and agencies.
    The now obsolete notion in terms of U.S. Constitutional law 
is called substantive due process, by which the courts put 
themselves in a position to second-guess and overturn 
legislation. The Lochner case you referred to was about 
workers' hours.
    It is substantive due process that was the mechanism used 
by the arbitrators in the financial services case, the Saluka 
case, which came down 2 years ago out of the Czech Republic. 
That's why I am concerned that the DNA of substantive due 
process is alive, and arbitrators are using it to second-guess 
the policy determinations of National Governments in terms of 
how to manage their bail-out strategies, and which economic 
emergency measures are appropriate.
    Mr. DOGGETT. Thank you. And I hope you will flesh out your 
specific proposals, just as Ms. Menghetti would give the 
critique of it.
    And I would just say, in closing, Mr. Chairman, thank you 
for--again, for doing this. I think when the congress approves 
an investor-state tribunal, we are making a decision that our 
open federal justice system is not the appropriate forum, that 
we need to move to an unelected tribunal to do it. It has great 
potential consequences for the taxpayer, who might ultimately 
be called on to fund one of these judgements, and it has great 
potential for harm to the ability of our governments to enact 
reasonable environmental, health, and safety laws.
    That has to be considered in balancing it against the need 
to protect our investors at home and abroad. And I think 
today's hearing takes us a step forward in trying to reach a 
reasonable balance. Thank you very much.
    Chairman LEVIN. And, of course, one dilemma we face is if 
we insist on a tribunal in terms of actions of another country, 
can we insist that they use our courts? And we have thrashed--
we have talked about these kinds of issues, and we did, in 
terms of worker rights provisions, if I might say so, where we 
insisted that there be parity.
    And so, you raise an important issue, but I think we need 
to look at it--I know you agree--kind of in a well-rounded way.
    Well, are we done? Yes, Mr. McDermott.
    Dr. MCDERMOTT. Mr. Chairman, I know you all see those 
cameras up there on the wall behind us. And for those people 
who are watching this, it looks like a pretty arcane subject. 
And I am not a lawyer, and I am not a banker, and I am not 
involved in international trade. But what I am interested in is 
that Members of Congress have the opportunity to establish good 
public policy, and then not have it taken away by some trade 
agreement or arbitrary group of tribunals some place.
    So, Mr. Stumberg, I would like at least your observation as 
to what you think is the most protective of the public common 
good that we could do in these laws to change, alter--I 
understand money is important. I mean, God knows, we cannot do 
without money, right? But money does not necessarily, in my 
view, trump the common good.
    So, I want a system of trade agreements that does not trump 
the common good, whether it is in Honduras or the United 
States. And I would like to hear from you what you think we 
ought to do with this issue.
    Mr. STUMBERG. Let me limit my answer to the two most 
important investor protections. Recall earlier what you were 
talking about America's defense team and the offense team. The 
defense team is a crack squad of lawyers at the U.S. State 
Department, and they successfully defended the California 
measures in the Methanex case, which we should all celebrate.
    My radical proposal, Linda, for improving the----
    Dr. MCDERMOTT. Let me just stop you right there. One thing 
on that bunch, on the defense side.
    Mr. STUMBERG. Yes?
    Dr. MCDERMOTT. Have there been things done in the last 
Administration to weaken that division of the State Department, 
and their ability to protect the common good?
    Mr. STUMBERG. Not to my knowledge.
    Dr. MCDERMOTT. No?
    Mr. STUMBERG. They are healthy and thriving.
    Dr. MCDERMOTT. Okay.
    Mr. STUMBERG. They won the Methanex case, and they got the 
arbitrators to adopt the following one-sentence conclusion 
about the scope of expropriation. May I read it to you? I am 
proposing this as yet a further improvement.

       ``As a matter of general international law, a non-
discriminatory regulation for a public purpose, which is 
enacted in accordance with due process, and which affects the 
foreign investor, is not deemed an expropriation.'' That is 
more protective of the public interest than even the crafted 
language that Mr. Posner was talking about before. I would 
submit that idea as the best the State Department's lawyers 
have accomplished: it is the high water mark of clarity in an 
arbitral decision.

    And then, with respect to the other investment protection, 
the minimum standard of treatment, the so-called substantive 
due process issue, the brief of the State Department's lawyers 
in the Glamis case is a masterpiece.
    Unfortunately, it is a long masterpiece. But if you look at 
page 221, you will see that----
    Chairman LEVIN. It is long.
    Mr. STUMBERG. You will see that definition----
    Dr. MCDERMOTT. I will have my staff write down, ``221.''
    Mr. STUMBERG. And I will leave it for you. The customary 
international law treatment of aliens, which the State 
Department lawyers have, in scholarly fashion, illuminated in a 
way that is a logical, tight and unambiguous definition. It is 
tighter, more clear, and less risky than even the improved 
language in the draft Panama and Korea--free trade agreements.
    So, I would submit page 221 of the brief of the State 
Department is the United States Government's lawyers' best 
guidance on how to clarify this investor protection.
    Dr. MCDERMOTT. Okay, anyone else want to make a quick 
comment? You have got a minute. Ms. Lee.
    Ms. LEE. I just wanted to make a quick comment about the 
broad issue here. I certainly understand, from the point of 
view of American companies, that they want the strongest 
possible protections when they go overseas. I sympathize with 
that.
    But I also think it is important that we clarify that the 
interests of the United States are not entirely synonymous with 
the interests of U.S. multi-national corporations. Particularly 
when I talk about my members, working people, the outward 
foreign direct investment in many cases--not every case, but 
many cases--is about taking our jobs and moving them to another 
country, and then seeking the kinds of protections in that 
country that they would have had if they had stayed home in the 
United States of America.
    So, it is not an irrelevant issue, it's not an arcane issue 
for our members. This is the intersection of trade and 
investment. It is all about globalization and outsourcing and 
offshoring and who is taking care of workers and communities 
and the environment back home.
    And we care also, as you do, I know, about whether this is 
good governance for developing countries, whether they are 
giving up too many rights because the corporations in the 
United States are so powerful and have the best lawyers and 
good teams, and they can afford--they have deep pockets. U.S.-
based multinational corporations can bring these cases to 
challenge domestic laws in other countries. For example, in 
Mexico, Metalclad challenged the Mexican government's decision 
not to grant the permits to have a toxic waste disposal in a 
place where they thought it wasn't environmentally appropriate.
    The issues are tremendously important. The competitiveness 
of U.S. companies is not the same as the profitability of U.S. 
companies operating abroad. We would define competitiveness as 
the ability of U.S. companies who are operating on American 
soil to survive and thrive in a global economy.
    We just need to remind ourselves what the ultimate goal is 
of our trade and investment policy--that it's not to have more 
trade and investment for the sake of that, it is to make sure 
that trade and investment is serving the social goals. Thank 
you.
    Dr. MCDERMOTT. I yield back the balance of my time.
    Chairman LEVIN. Mr. Herger.
    Mr. HERGER. Thank you, Mr. Chairman. Ms. Menghetti, we 
frequently hear the allegation that U.S. companies that have 
investments abroad have somehow turned their back on the United 
States in search of low-cost labor and other weak regulatory 
standards. I am pleased that some of my colleagues have joined 
me today in pushing back on that notion.
    The facts simply tell a different story. Foreign operations 
complement U.S. operations. One particular fact that caught my 
eye is that the overwhelming majority of existing outbound U.S. 
foreign direct investment goes to developed country markets, 
like Europe and Canada, that have strong labor protections. 
Right now, only 1 percent of U.S. foreign investment goes to 
China, for example.
    Ms. Menghetti, how does the fact that most U.S. investment 
is in high-wage countries reconcile with the perception some 
people have that this investment is simply offshoring American 
jobs to low-wage countries in search of increased profits?
    Ms. MENGHETTI. I think it absolutely contradicts that type 
of allegation about outsourcing. As you indicated, most U.S. 
investment abroad is in high-wage countries. When companies go 
overseas to invest, they do so for many, many reasons. They do 
so, in primary part, to be able to access the 95 percent of the 
consumers outside the United States, and those with the 
greatest purchasing power. And those are in the highest wage 
countries.
    I believe Congressman Brady said at the outset the very 
striking statistic that the output of U.S. subsidiaries 
overseas, the vast majority of it, over three-quarters of it--
stays outside the United States. Or, actually, it's much higher 
than that, it's 95 percent of the U.S. output of U.S. 
subsidiaries overseas stays overseas. About five to 7 percent 
comes back to the United States. This isn't about outsourcing. 
This is about making the U.S. economy, U.S. industries, and our 
U.S. workers stronger.
    I have companies who tell me that one dollar out of every 
four that they pay their U.S. employees is because of their 
overseas operations. Overall, for U.S. companies that are 
globally engaged, about half of all their income comes from 
their operations overseas.
    Foreign investment strengthens U.S. companies. It 
strengthens the U.S. economy, and provides very good-paying 
jobs for U.S. workers, and strengthens the ability of companies 
to have those workers here in the United States.
    Mr. HERGER. Thank you. And, Ms. Menghetti, in your 
testimony you talked about how important it is for the U.S. 
service sector to be able to establish foreign operations to 
serve customers in those markets. That statement seems to 
reconcile with data I have seen from the Commerce Department 
that shows that virtually all the growth in the employment of 
U.S. companies' foreign operation has been in sectors other 
than manufacturing. Would you agree with that conclusion?
    Ms. MENGHETTI. I absolutely would, Congressman. For U.S. 
service suppliers, the vast majority of their sales have to be 
sales from their overseas subsidiaries to the local market. 
There is some--cross-border services sales, but most of it is 
affiliate operations.
    You can't provide banking services, you can't provide other 
services sitting here, in the United States, for the most part. 
And that is exactly why the United States service sector, one 
of our most vibrant sectors, has really been able to benefit 
from overseas investment. And that helps us back here, in the 
United States, because a lot of the basic documents that those 
service providers use in their overseas markets--policies, 
manuals, and other research and development--that still stays 
back here, in the United States, and grows the U.S. companies 
back here, home, as well.
    Mr. HERGER. Thank you very much for your testimony. This is 
very important. It is so easy to get caught up on the thought 
that these issues are hurting our economy when, in essence, we 
need to be encouraging this type of effort and investment, 
because it ultimately helps us and helps our workers, and helps 
the U.S. economy.
    So, thank you very much. And, Mr. Chairman, I yield back.
    Chairman LEVIN. Okay. I will resist the temptation to 
comment on that. Because my plea is that we try to look at 
various sides of an issue. Mr. Herger, when you say, 
``ultimately, it benefits,'' it doesn't always.
    And this isn't a hearing on manufacturing, but if it were I 
think I could give you some very prime examples of where it is 
more complicated than that. And we are going to be in the 
manufacturing area in the next days, discussing the very issue 
of the interaction of globalization and how it works out for 
people who work here.
    And so, indeed, I think the thrust of this hearing is to--
and it has been, I think, extremely, very useful--is to try to 
take a fresh and a well-rounded view of these issues. And, Ms. 
Lee and Ambassador Larson, you are now charged to carry that 
on. And we wanted to have this hearing, in part, so we could 
provide input, and in part because we want there to be a lot of 
interaction in the days ahead.
    So, Ms. Menghetti, you are going to send us some further 
material. I think, Professor Stumberg, you have been asked by 
Mr. Doggett to send some further material. And the others of 
you, if you would like to do that, do so, I think in the case 
of the ambassador and Ms. Lee, you probably will refrain from 
that as you undertake your responsibilities. And we are hopeful 
that, as you say, you will proceed expeditiously.
    Well, I want to thank my colleague, the Ranking Member, and 
my colleagues on all sides. This, I think, has set an example 
of the kind of approach of hearing we are going to have as we 
craft a comprehensive new trade policy for the United States of 
America.
    Thank you very much. We are now adjourned.
    [Whereupon, at 1:07 p.m., the Subcommittee was adjourned.]
    [Submissions for the Record follow:]
                    Statement of Chevron Corporation
    Pursuant to the notice for the May 14, 2009 Subcommittee Hearing on 
Investment Protections in U.S. Trade and Investment Agreements, Chevron 
is pleased to submit these comments for the record. The issue of 
international investment protection is critically important to Chevron. 
We are a leading international oil company with major operations in the 
world's most important oil and gas regions. We have extensive 
international investments in refining, fuels and lubricants. Other 
interests range from chemical production and mining to energy research 
and nanoscience. We also operate power facilities and are the world's 
largest producer of geothermal energy. We urge the Committee to support 
a strong program to expand investment protection agreements and resist 
weakening the high quality standards reflected in the 2004 Model 
Bilateral Investment Treaty (BIT), which risks further narrowing of the 
provisions vital to protect U.S. interests abroad.
    Investment protection is an issue with real-world implications--a 
substantial portion of Chevron's overseas investments are made in 
countries without high-quality investment protection agreements with 
the United States, even as many of these countries pursue investment 
agreements with other trading partners. Sustained progress toward a 
comprehensive global investment protection regime is necessary to both 
reduce the risk associated with overseas investments and to ensure that 
U.S. companies are not disadvantaged against foreign competitors whose 
investments are protected by such agreements. High-quality investment 
protection agreements, along with measures to promote good governance 
and the rule of law, are indispensible to provide a level playing field 
for U.S. companies operating abroad and to ensure that we have the 
tools available should we be subject to expropriation or 
nationalization of our assets.
    High-quality investment rules are crucial to maximizing global 
economic growth, and investment protection has particular relevance for 
energy investments. The International Energy Agency estimates that 
around $26 trillion in new investments will be needed to meet rising 
global demand for energy between 2007 and 2030. These investments will 
not only underpin global economic growth, but they also represent 
important investment opportunities for U.S. companies and the countries 
where we undertake the investment.
    In addition to providing important energy supplies, these 
investments can represent excellent opportunities for engagement and 
delivering long-term socioeconomic benefits. Chevron's approach is 
anchored in partnerships with governments, communities, local and 
international nongovernmental organizations, and development agencies. 
We have built a number of partnerships on trust, transparency, mutual 
learning and a common purpose to promote human progress and economic 
development. We address social issues by working together and 
delivering results ``on the ground.'' Our community engagement programs 
enhance our ability to conduct business in many parts of the world. In 
2008, we invested $160 million in our community engagement initiatives. 
Most was invested in our three primary focus areas--improving access to 
basic human needs, enabling education and training opportunities, and 
promoting sustainable livelihoods.
    Energy projects require substantial capital commitments and tend to 
be very long term. Free trade agreements with strong investment 
chapters and bilateral investment treaties reduce the risks associated 
with these projects and ensure benefits for both U.S. energy supplies 
and consumers at home and abroad. These agreements also benefit the FTA 
or BIT partner, making them more attractive for foreign investment and 
foreign capital.
The United States plays an important role promoting a global investment 
        protection regime
    Chevron believes that the U.S. government's trade and investment 
agenda should continue to include a long-term commitment to improved 
investment disciplines and progress toward investment agreements with 
critical energy suppliers and consumers, including countries like 
Angola, Brazil, Cambodia, China, India, Indonesia, Iraq, Kuwait, 
Malaysia, Nigeria, Russia, Saudi Arabia, South Africa, Korea, Thailand, 
Venezuela, and Vietnam. The U.S. can retain a leadership role by 
ratifying pending trade agreements which contain quality investment 
chapters and by continuing to pursue active BIT negotiations with China 
and willing countries that demonstrate a commitment to economic 
openness and reform.
Chevron believes that investment disciplines in the FTA Investment 
        Chapters and Model BIT Must Be Preserved
    Chevron believes that the U.S. government should work to ensure 
that future agreements continue to reflect the high-quality standards 
established in the 2004 Model BIT. These important provisions include:

          Fair and equitable treatment of investors (e.g., due 
        process and access to additional rights in accordance with 
        international law).
          Full protection and security of investments.
          Clear limits on expropriation of investments and 
        prompt, fair compensation when expropriation occurs.
          Free transfers of capital.
          Access to reliable, independent, international third-
        party dispute resolution (e.g. investor-state arbitration).
          Coverage of existing investments.

    As noted above, Chevron's operations have global reach. Our ability 
to continue to do business in foreign jurisdictions and to protect our 
shareholder investments is dependent on strong contractual provisions 
backed by strong mechanisms for resolving disputes, including 
international arbitration. Any further restriction to our access to 
international arbitration for our international investments would 
dramatically shift the risk profile for those investments, and put us 
at a disadvantage compared to foreign competitors covered by treaties 
which contain such provisions.
    In our view there is no justification to modify the language of the 
2004 Model BIT and further narrow its provisions in response to the 
specific concerns cited in the hearing notice. (In fact, these issues 
were addressed at the direction of Congress in the development of the 
2004 BIT language; further narrowing would signal an important reverse 
of a longstanding U.S. commitment to trade and investment). In 
particular, we want to focus on investor-state arbitration and offer a 
specific example to illustrate the critical importance of international 
dispute resolution to U.S. business.
The importance of investor-state arbitration provisions
    Chevron operates with high ethical standards and values engagement 
and partnership, and we rarely expect to arbitrate international 
disputes. We diligently seek to resolve disagreements before they 
require adjudication and note that the availability of an investor-
state arbitration mechanism increases the likelihood that good faith 
negotiations can be successfully concluded. This is an important point 
that cannot be overemphasized. The presence of a treaty enables the 
investor to pursue more meaningful discussions with a host government 
and settle most disputes on an equal basis. Nonetheless, there are 
circumstances where investor state arbitration is the only way a fair 
hearing can be obtained and it remains an important last resort.
    Chevron operates in countries whose laws do not provide adequate 
safeguards and protections for our investment, and lack the 
institutional capacity and resources to administer the rule of law in 
an effective and transparent manner. A very real example of this 
situation exists in Ecuador, where Chevron is involved in a long-
standing dispute about who is responsible for acknowledged 
environmental impact in part of Ecuador's Amazon region.
    Texaco Petroleum (TexPet, a subsidiary of Texaco Inc. which merged 
with Chevron in 2001) was a partner with the Ecuadorian state oil 
company in a consortium that shared on an equity basis all revenues, 
costs, and liabilities derived from the consortium operation of an oil 
concession. Although opportunities for environmental remediation were 
identified as the Concession Agreement expired in 1992, the state oil 
company (Petroecuador) refused to participate with its equity share of 
the remediation costs. In 1995, a Settlement Agreement was signed by 
the Republic of Ecuador, Petroecuador and Texpet, by which Texpet 
agreed to conduct remediation in accordance with a scope of work 
proportional to TexPet's equity share in the former consortium, at its 
sole cost and under close government and partner supervision and 
approval. Upon execution of the 1995 Settlement Agreement, the Republic 
of Ecuador and Petroecuador released TexPet of any further 
environmental liabilities with regard to all sites not included in the 
scope of work for which TexPet was responsible, and Petroecuador, as 
the sole owner and operator of the former consortium fields, assumed 
the responsibility for the remaining remediation required in the areas 
excluded from the TexPet scope of work. In 1998, after a site by site 
certification and approval process by inspectors representing four 
agencies of the Government of Ecuador, the Republic of Ecuador and 
Petroecuador granted TexPet and its affiliated companies a full and 
complete release from any further environmental liability arising out 
of the former consortium operations.
    After the partnership ended, Petroecuador continued to operate the 
former consortium fields by itself for years with a well-documented 
record of oil spills and other serious environmental mismanagement. In 
2003, private plaintiffs filed a lawsuit in Ecuador against Chevron 
alone--not Petroecuador--for environmental remediation of the entire 
former concession area, seeking the retroactive application of a law 
enacted in 1999. As part of the evidence production in the process, the 
parties have requested the court to conduct judicial inspections at a 
number of sites. The first and only judicial inspection completed, with 
a report issued by five independently court appointed settling experts, 
confirmed that the remediation work conducted by TexPet at that site 
met all parameters of compliance mandated by the Government, and that 
the remediated areas pose no significant risk to the health of human 
beings at that site.
    After this setback, the plaintiffs then began a successful campaign 
of political pressure which has resulted in unfair treatment and a 
denial of due process to Chevron. Unfortunately, Petroecuador did not 
fulfill its obligations to clean up the sites and has also been 
operating for almost nineteen years without sufficient attention to the 
type of environmental safeguards common under international practices. 
Furthermore, there have been a number of developments in the 
proceedings against Chevron since 2007 that have compromised Chevron's 
ability to get a fair judicial hearing, including presidential 
interference, unethical conduct by plaintiff's attorneys and a judicial 
process that has failed to respect the law.
    A U.S. State Department report issued earlier this year concluded 
that ``systematic weakness and susceptibility to political or economic 
pressure in the rule of law'' and ``corruption and denial of due 
process'' are common in Ecuador, and noted in particular that disputes 
with U.S. companies have become politicized. Transparency International 
consistently ranks Ecuador near the bottom among countries it surveys 
in the region. Ecuador ranked 151 out of 180 countries surveyed for 
Transparency International's Corruption Perceptions Index 2008 and 
received a score of 2 out of 10 (10 highly clean, 0-highly corrupt). In 
recent years, and especially since the election of President Rafael 
Correa, Chevron has experienced increasing unfairness and denial of 
justice in the case. Multiple international observers have concluded 
that Ecuador's judiciary today is dominated by the executive and 
legislative branches, and ample evidence supports that proposition. 
President Correa has pledged his full support to the plaintiffs and 
their supporters. His government has repeatedly proclaimed Texaco and 
Chevron guilty, and his administration's open support for the 
plaintiffs and intervention in the legal proceedings show a corrupt and 
ongoing joint effort to impugn the reputation of Chevron and its 
employees, to try to shift Petroecuador's liabilities to Chevron.
    This example illustrates the importance of investor-state 
arbitration provisions which exist in the current U.S.--Ecuador 
Bilateral Investment Treaty. Even though TexPet fulfilled all of its 
responsibilities in accordance with the executed agreements, it and its 
affiliates have been victims of a denial of justice and lack of due 
process in the Ecuadorian courts. Only when we obtain a full and fair 
hearing in a legitimate court or international tribunal will the facts 
in this case be considered on an impartial basis, and only then will 
Chevron and its affiliate receive fair and impartial justice. Without 
investor-state arbitration in this case, we would be facing a massive 
and fraudulent verdict against us with no means of redress.
Moving forward
    As the Committee reviews this important issue and the 
Administration reviews the 2004 Model BIT, we urge that any changes to 
the BIT seek to improve the protection afforded to U.S. investors and 
bring benefit to the U.S. economy, energy security, companies and 
workers alike. Narrowing protections and restricting access to investor 
state-arbitration will disproportionately impact U.S. companies abroad, 
and set a precedent that will move us farther from the goal of 
achieving a strong global international investment protection regime. 
U.S. leadership is imperative to ensure that U.S. companies can compete 
on a level international playing field.
    Chevron appreciates this opportunity to provide input to the 
Subcommittee and would welcome further dialogue.

                                 
            Statement of the Coalition of Service Industries
    The Coalition of Service Industries (CSI) appreciates the 
opportunity to submit a statement for the record on investor 
protections in U.S. trade and investment agreements. CSI is the leading 
business association dedicated to reducing barriers to U.S. services 
exports and investment and mobilizing support for policies that enhance 
the global competitiveness of U.S. service providers.
    The importance of services in the U.S. economy has been increasing 
for decades. Services comprise 78% of U.S. private sector GDP and 80% 
of private sector employment. U.S. services companies are the world's 
most innovative and competitive, but with 95% of the world's consumers 
living outside the United States, these companies must increasingly 
look overseas if they are continue to grow and create American jobs.
Why Invest Abroad
    New customers abroad can expand U.S. companies' revenues and 
profitability much more than can the U.S. market alone. Despite the 
large size of our economy, the past generation has seen slower growth 
in the U.S. compared with much of the rest of the world. From 1990-
2008, U.S. GDP grew at an average below that of the rest of the world, 
and significantly below that of emerging and developing economies as a 
whole.\1\
---------------------------------------------------------------------------
    \1\ Slaughter, Matthew. ``How Multinational Companies Strengthen 
the U.S. Economy.'' Published by the Business Roundtable and United 
States Council Foundation, Spring 2009.
---------------------------------------------------------------------------
    Direct investment is one of the principal ways by which U.S. 
services companies compete in the global marketplace. Sales of services 
through direct investments in foreign markets account for the largest 
share of global trade in services. U.S. sales of services through 
companies' affiliates in foreign markets are significantly larger than 
crossborder exports of services; such sales totaled $806 billion in 
2006, up from $413 billion in 2000.\2\
---------------------------------------------------------------------------
    \2\ Bureau of Economic Analysis, Survey of Current Business, 
October 2008. Data cited are the latest available.
---------------------------------------------------------------------------
    Investment in foreign markets is an imperative for many U.S. 
services companies for a variety of reasons. In some cases, a physical 
presence may be a legal requirement in order to supply a service. In 
many other cases, the inherent nature of the service is such that it 
cannot be supplied crossborder, but must be provided directly to 
clients and customers via an on-the-ground presence in a foreign 
market.


              SALES OF SERVICES BY U.S. FOREIGN AFFILIATES
                            (U.S. $ millions)                                            2004       2005       2006All Countries                              642,840    725,036    806,310
Canada                                      65,166     77,651     88,826
Europe                                     366,899    412,624    457,921
Latin America & other Western               63,652     72,414     80,084
 Hemisphere
Africa                                       8,108     10,008     10,469
Middle East                                  3,446      4,026      5,478
Asia & Pacific                             135,569    148,313    163,533Source: U.S. Bureau of Economic Analysis


The Benefits of Foreign Investment
    Economic activity abroad by U.S. firms complements domestic 
activity. U.S. companies' presence in foreign markets has contributed 
strongly to productivity growth in the United States, and thus to 
higher living standards.\3\ According to one study, each dollar of 
additional foreign capital spending is associated with $3.50 of 
additional domestic capital spending. Further, U.S. firms' expansion of 
employment abroad is associated with expanded employment in the United 
States.\4\ It is often assumed that U.S. companies are ``exporting 
jobs'' when they hire workers in foreign countries, but the historical 
data show the opposite: when U.S. companies expand their employment 
abroad, they also generally tend to expand domestically. Viewed over 
the longer term, the data demonstrate that, rather than being 
substitutes for one another, the domestic and foreign operations of 
U.S. companies have been complementary.\5\
---------------------------------------------------------------------------
    \3\ Economic Report of the President, February 2007, p. 168.
    \4\ Ibid., p. 184.
    \5\ Ibid, pps. 185-6.
---------------------------------------------------------------------------
    The United States also benefits tremendously from inward investment 
by foreign companies, and services related foreign investment 
constitutes the bulk of total foreign investment in the U.S. Such 
investment supported 3.2 million American jobs in 2006, or about 60% of 
all jobs supported by foreign investment in the United States.\6\ 
Inward foreign direct investment contributes to productivity growth, 
provides a source of financing for the current account deficit, and 
generates high-paying jobs for American workers.
---------------------------------------------------------------------------
    \6\ Bureau of Economic Analysis, Interactive Data Tables.
---------------------------------------------------------------------------
    Foreign investors participate in a wide variety of services 
activities in the United States. Among the 50 states, services-related 
foreign investors are particularly large employers in California, New 
York, Texas, Florida, New Jersey, Pennsylvania, Massachusetts, George, 
and North Carolina. (See Annex I for more detail).
    In short, both inward and outward foreign direct investment 
contribute to higher levels of productivity and employment in the 
United States.
The need for investor protections
    Foreign investments are by nature long-term commitments, and 
require high levels of investor confidence. Sufficient investor 
protections are in turn crucial for investor confidence, and in 
creating a climate in the host country in which high-quality, long-term 
investment can be attracted. Predictability, the rule of law, contract 
sanctity, and property rights are all essential. For those reasons, CSI 
members place great importance on bilateral investment treaties, and on 
the investment chapters of our bilateral free trade agreements.
    These agreements provide for market access or the right to 
establish a commercial presence, and they protect U.S. investment 
abroad while attracting U.S. investment and trade to the partner 
economies. They encourage the adoption of market-oriented domestic 
policies that treat private investment in an open, transparent, and 
non-discriminatory manner and encourage services companies to secure a 
physical presence in a foreign market.
    CSI seeks several characteristics in BITs and in the investment 
chapters of FTAs.

        --  The investor-state arbitration mechanism. This is one of 
        the most crucial elements of a sound investment regime. The 
        investor-state dispute settlement mechanism can ensure U.S. 
        investors that their investments are protected against 
        arbitrary, discriminatory and unfair government actions.
        --  A broad definition of ``investment,'' which includes 
        portfolio investment, not solely cross-border investments with 
        long-term aims.
        --  Appropriate protections against direct and indirect 
        expropriation and guarantees of prompt, adequate and effective 
        compensation when it occurs.
        --  The ability to transfer all payments related to an 
        investment.
        --  Retrospective application of investment protections. That 
        is to say, the protections should apply to pre-existing 
        investments, as has been in the case in our earlier bilateral 
        investment treaties.
        --  A ban on performance requirements, such as the requirement 
        to export a certain portion of output, or to hire certain 
        numbers of host country nationals.
        --  Pre-establishment provisions, under which national 
        treatment is extended to investors prior to establishing in a 
        market.
        --  Use of a negative list, stating the specific services that 
        will be exempted from coverage in the agreement, with all other 
        services open to investment.

Conclusion
    Employing 80% of the U.S. workforce and accounting for 78% of our 
GDP, the service sector is a driver of U.S. economic growth and jobs. 
Central to sustaining the growth of this dynamic sector is the ability 
of U.S. companies to expand abroad to provide services to customers in 
fast-growing foreign markets. Investment abroad is therefore part and 
parcel of continued U.S. economic growth, as is investment in the 
United States by foreign service providers. The confidence and 
predictability that are afforded by strong investor protections help 
make such investments viable, with important economic benefits for both 
the investor and the host country alike.


                            ANNEX I: U.S. EMPLOYMENT SUPPORTED BY FOREIGN INVESTMENT
----------------------------------------------------------------------------------------------------------------
     Employment Supported by Foreign Investment By State and Industry Sector, 2006 (thousands of employees)
-----------------------------------------------------------------------------------------------------------------
                                                        Total             Manufacturing       Services & other
----------------------------------------------------------------------------------------------------------------
Alabama                                                        73.6                  45.6                  28
Alaska                                                         12.2                   2.7                   9.7
Arizona                                                        71.1                  20                    51.2
Arkansas                                                       33.7                  23.6                  10.1
California                                                    572.5                 187.2                 385.2
Colorado                                                       75.9                  24.5                  51.4
Connecticut                                                   104.9                  38                    66.9
Delaware                                                       25.2                  11.2                  14.1
District of Columbia                                           17.3                   3.2                  14.1
Florida                                                       248                    66.8                 181.2
Georgia                                                       173.6                  62.9                 110.8
Hawaii                                                         28.5                   2.9                  25.6
Idaho                                                          13                     4.3                   2.7
Illinois                                                      243.1                  90.1                 153
Indiana                                                       148                    95.9                  52.1
Iowa                                                           40.2                  21.5                   9.3
Kansas                                                         46.5                  26.1                  20.4
Kentucky                                                       91                    47                    44
Louisiana                                                      49.7                  16.3                  33.4
Maine                                                          24.4                   7.9                   3
Maryland                                                      104.1                  26.6                  77.5
Massachusetts                                                 173                    49                   124
Michigan                                                      195.5                 119.6                  75.9
Minnesota                                                      86.5                  28.4                  58.1
Mississippi                                                    25.7                  10.4                  15.4
Missouri                                                       85.7                  47.1                  15.1
Montana                                                         6.8                   1.8                   5
Nebraska                                                       18.7                  10.7                   3.6
Nevada                                                         35.9                   9.1                   9.3
New Hampshire                                                  37.1                  20.2                  16.9
New Jersey                                                    230.5                  79.5                 150.9
New Mexico                                                     14.2                   2.4                  11.9
New York                                                      389.3                  69.7                 319.8
North Carolina                                                209.4                  98.6                 110.8
North Dakota                                                    8.3                   3.9                   1
Ohio                                                          213.3                 114.7                  98.6
Oklahoma                                                       35.9                   *                     6
Oregon                                                         44                    15.7                  28.4
Pennsylvania                                                  249                   112.4                 136.6
Rhode Island                                                   19.5                   4                    15.5
South Carolina                                                114.3                  62                    52.3
South Dakota                                                    6.7                   3.6                   3.2
Tennessee                                                     140.3                  72.4                  67.8
Texas                                                         368.2                 130.2                 238
Utah                                                           34.6                  10.6                  23.9
Vermont                                                         9.8                   3                     1.1
Virginia                                                      150.8                  44.1                 106.6
Washington                                                     88.2                  27.7                  60.5
West Virginia                                                  19.9                  10.1                   9.9
Wisconsin                                                      87.2                  44.6                  42.6
Wyoming                                                         8                     2.1                   5.8
----------------------------------------------------------------------------------------------------------------
TOTALS                                                      5,331                 2,032                 3,158
----------------------------------------------------------------------------------------------------------------
* data suppressed to maintain confidentiality.
Note: totals may not match the sum of the 50 states due to suppression of some data to maintain confidentiality
Source: Bureau of Economic Analysis, Interactive Data Tables.


                                 
                  Statement of Kevin P. Gallagher \1\
---------------------------------------------------------------------------
    \1\ Professor of International Relations, Boston University, Senior 
Researcher, Global Development and Environment Institute, Tufts 
University. This testimony presents the views of the author only and 
not those of either university.
---------------------------------------------------------------------------
    Mr. Chairman, Members of the Subcommittee, thank you for the 
opportunity to speak to you today about this critical issue on behalf 
of the Working Group on Development and the Environment In the 
Americas, a group of economists that I co-chair from across the Western 
Hemisphere that has been studying the economic impacts of foreign 
investment liberalization under U.S. investment and trade agreements in 
our respective countries.
    We particularly applaud you for expressing concern about the extent 
to which ``the FTAs and BITs give governments the ``regulatory and 
policy space'' needed to protect the environment and the public 
welfare.'' It is to these concerns that we address this testimony.
    As I mentioned, we conducted a comprehensive review of the impacts 
of foreign investment liberalization in Latin America and show how 
foreign investment liberalization through Bi-lateral Investment 
Treaties (BITS) and Preferential Trade Agreements (PTAs) has fallen far 
short of stimulating broad-based economic growth and environmental 
protection in the region. Given this finding, in a report for policy-
makers and in a peer-reviewed book we recommend that the ``policy 
space'' for policies that enable foreign investment to stimulate growth 
and sustainable development should be accommodated in future BITS, PTAs 
and in the global trade regime.\2\
---------------------------------------------------------------------------
    \2\ The policy report, titled Foreign Investment and Sustainable 
Development: Lessons from the America can be downloaded at: http://
ase.tufts.edu/gdae/WorkingGroup_FDI.htm. The book and full-length 
studies, Rethinking Foreign Investment for Sustainable Development: 
Lessons from Latin America, is available at: http://www.amazon.com/
Rethinking-Foreign-Investment-Sustainable-Development/dp/1843313162.
---------------------------------------------------------------------------
    Our research, outlined below, suggests a number of specific 
measures that should be honored in terms of policy space for 
development-oriented policies in U.S. BITS and FTAS:

          The right to exercise pre-establishment screening of 
        firms wishing to enter a market, including but not limited to 
        an environmental impact assessment of the investors.
          The right to deploy capital controls and other 
        counter-cyclical policies to prevent and recover from economic 
        crises.
          The right to deploy selective performance 
        requirements such as, but not limited to, joint venture 
        requirements, environmental technology requirements, and other 
        instruments that will encourage broad-based growth in the host 
        country.
          The right, post establishment, for host nations to 
        seek and publicize information from a potential investor, 
        including environmental, labor, and social information.
          Our research also suggests that host nations should 
        also deploy their own national innovation, competitiveness, 
        employment, labor rights, and environmental regulations. And 
        most importantly that upon entering an agreement with the 
        United States that these issues become part of an 
        institutionalized and longer run agenda for reform and 
        harmonization.
          Finally, our research suggests that treaties should 
        designate a venue, such as the international court in The 
        Hague, where conflicts between BITS, FTAS and other regional 
        and multi-lateral treaties can be resolved.

Summary of Research
    In our research, development and environmental economists from the 
United States, Mexico, Brazil, Argentina, Chile, and Costa Rica wrote 
the report based on original research from across the region. In case 
studies on Argentina, Brazil, Bolivia, Chile, Costa Rica, Ecuador, 
Mexico, Uruguay, and Venezuela. The Working Group examined how foreign 
investment during the reform period has affected economic growth, 
environmental policy and performance, and the countries' political 
economies.
    Beginning in the early 1990s, nations in the Americas began to 
liberalize their regimes for foreign investment. Pursued unilaterally 
or BITS or PTAs, a typical set of reforms included the elimination of 
performance requirements such as requirements to source from domestic 
firms or to export a certain percentage of production, restrictions on 
the ability to exclude certain sectors from FDI and to ``screen'' 
foreign investment for development goals, restrictions on the ability 
to require joint ventures or research and development facilities, and 
so forth. Moreover, such reforms alter the nature of settling disputes 
over foreign investment. Whereas trade agreements have traditionally 
relied on states to settle disputes among themselves in international 
fora, newer trade and investor agreements have ``investor-state'' 
dispute systems where foreign firms can directly sue a national or 
local government without host government oversight.
    These policies were advocated by the U.S. government, the World 
Bank, and the International Monetary Fund and endorsed enthusiastically 
by many governments across the Americas. They have become enshrined in 
the 1994 North American Free Trade Agreement (NAFTA) between the U.S., 
Canada and Mexico, which became the template for subsequent regional 
and bilateral accords, including agreements on the U.S.-Chile Free 
Trade Agreement, the U.S.-Dominican Republic-Central America Free Trade 
Agreement (CAFTA), the U.S.-Peru Free Trade Agreement and countless 
numbers of Bilateral Investment Treaties (BITS). Investment 
liberalization of course, has been part of a larger effort broadly 
referred to as the Washington Consensus. The broader reforms include a 
package of economic policies that promote economic development by 
opening national economies to global market forces. Over the last 
twenty years, governments throughout Latin America have reduced tariffs 
and subsidies, eliminated barriers to foreign investment, restored 
fiscal discipline by reducing government spending, and have generally 
reduced the role of the state in all aspects of the economy.
    The promise, among others, of following these policies is that FDI 
by multinational corporations will flow to developing countries and be 
a source of dynamic growth. Beyond boosting income and employment, the 
hope was that manufacturing FDI would bring knowledge spillovers that 
would build the skill and technological capacities of local firms, 
catalyzing broad-based economic growth; and environmental spillovers 
that would mitigate the domestic ecological impacts of industrial 
transformation.
    These policies and agreements have raised concerns, in part because 
they have shown poor results. Economic growth in per capita terms in 
the region was slower than in the last decades of the import 
substitution period--less than 2% since 1990, the period of the 
reforms. A major finding of our work is that slow growth is in part 
explained by the fact that FDI failed to lead to more total investment 
into Latin American economies.
    Among our main findings are:

        1.  FDI was concentrated in a small handful of countries in the 
        region. Brazil, Mexico, Argentina, Chile and Venezuela received 
        more than 80 percent of all the FDI in the region;
        2.  Foreign firms by-and-large located in Mexico and the 
        Caribbean tend to serve as export platforms to the United 
        States, whereas those that located in South America tend to 
        sell to domestic markets in that region.
        3.  FDI was attracted by traditional determinants, not 
        necessarily whether a nation has a regional or bilateral trade 
        and/or investment treaty or if it can serve as a pollution 
        haven for foreign firms;
        4.  When FDI did come, foreign firms tend to have higher levels 
        of productivity and higher wages and generally increase trade 
        in the region; yet
        5.  FDI fell far short of generating ``spillovers'' and 
        backward linkages that help countries develop, and in many 
        cases wiped out locally competing firms thereby ``crowding 
        out'' domestic investment.
        6.  The environmental performance of foreign firms was mixed, 
        sometimes leading to upgrading of environmental performance, 
        and in others performing the same or worse than domestic 
        counterparts.

    Working Group studies documented and analyzed the track record in 
specific countries and sectors as well:

          In Brazil, Argentina, Mexico--three countries that 
        have received the lion's share of FDI in the region--and Costa 
        Rica it found that:

                  Foreign firms have higher wages, 
                productivity, and trade vis a vis domestic firms
                  However, linkages with national firms and the 
                domestic economy in general are weak, specially in 
                Mexico and Costa Rica
                  Although foreign firms may bring the 
                technologies generated in their headquarters, they do 
                not contribute to an increase in R&D expenditures in 
                the host economies

          In Brazil, Mexico, Chile, and Argentina

                  Virtually all foreign firms transferred 
                environmental management systems to host countries; 
                however
                  It is not clear that such firms were actually 
                in compliance with host country laws and in Brazil 
                there is little indication that foreign firms were more 
                likely to be in compliance than domestic firms were;
                  There it little evidence that foreign firms 
                are greening their supply chains (given that so many 
                supply chains were wiped out from FDI); and
                  In some instances such as the forestry sector 
                in Chile, foreign firms that exported through fair 
                trade certification schemes were ``upgrading'' to 
                higher levels of environmental standards;
                  In others, such in Mexico's electronics 
                sector, foreign firms were not exporting to meet strong 
                standards in Europe given that their chief export 
                market, the United States, does not have such 
                standards.

          In Venezuela, Bolivia, Ecuador, and Uruguay

                  A Uruguayan BIT constrained the set of 
                policies available to solve a conflict over foreign 
                investment and transboundary environmental problems 
                with Argentina; whereas
                  BITs in Bolivia, Ecuador, and Venezuela were 
                refused by governments that were able to renegotiate 
                the terms of contracts with foreign hydrocarbon firms.

New Directions for FDI and Sustainable Development
    The Working Group found--in agreement with the broader literature 
on the subject--that investment regime liberalization-led FDI has had 
at best a limited success in Latin American countries.
    Hence, it comes as no surprise to find that virtually all newly 
elected governments in Latin America, and now your committee, are 
rethinking the role of FDI in their economies. While some countries are 
just beginning to debate the issue, others are going so far as to 
nationalize foreign firms. Yet, most governments are looking for a more 
balanced approach. What our research makes clear is that new policies 
are needed. Based on the research abovementioned, three broader lessons 
can be drawn out as principles for policy-making in this field:

          1. FDI is not an ends but a means to sustainable development. 
        Simply attracting FDI is not enough to generate economic growth 
        in an environmentally sustainabe manner. The report shows that 
        even in the nations that received the lion's share of FDI in 
        the region--Brazil, Argentina, and Mexico--FDI fell short of 
        generating spillovers and sustained economic growth. FDI needs 
        to be part of a comprehensive development strategy aimed at 
        raising the standards of living of the nation's population with 
        minimal damage to the environment.
          2. FDI policy needs to be paired with significant and 
        targeted domestic policies that upgrade the capabilities of 
        national firms and provide a benchmark of environmental 
        protection. There are numerous country-specific policies that 
        are either being implemented or debated regarding ways in which 
        Latin American nations can overcome information and 
        coordination externalities, access to credit problems, and 
        competitiveness issues on the part of their domestic firms. In 
        this regard, lessons from Asia may be drawn, since many nations 
        in that region have put in place targeted industrial policies 
        to link domestic firms to foreign firms to enable domestic 
        firms to develop into competitive exporters themselves.
          3. International agreements, whether at the World Trade 
        Organization (WTO) or at the level of BITS and PTAs need to 
        leave developing nations the ``policy space'' to pursue the 
        domestic policies necessary to foster sustainable development 
        through FDI. The emerging international regime of international 
        investment rules is restricting the ability of developing 
        nations to pursue some of the policy instruments that have been 
        successful at channeling FDI for development in Asia and 
        elsewhere. When acting collectively under the auspices of the 
        WTO developing nations have largely succeeded in blocking 
        proposals that would further restrict such policy space. 
        However, slower movement in global trade talks has led to a 
        proliferation of BITS and PTAs between developed and developing 
        countries where developing countries have much less bargaining 
        power and end up exchanging policy space for market access.

Final Remarks
    I would like to thank and congratulate the Chairman and the 
Subcommittee for holding this hearing today. In the wake of the current 
financial crisis it is both timely and important to review the elements 
of investment obligations in U.S. trade and investment agreements. The 
2004 model U.S. BIT outlaws measures such as capital controls, 
performance requirements, and technological transfer--all measures that 
the economics profession endorses and that the U.S. is advocating that 
nations across the world deploy and that we ourselves are conducting at 
home.
    Your hearings are an important first step in a more comprehensive 
review of U.S. trade and investment policy. I look forward to your 
questions, and to constructively working with you on these issues into 
the future.

                                 
                      Statement of Linda Menghetti
    The hearing on ``Investment Protections in U.S. Trade and 
Investment Agreements,'' held by the Subcommittee on Trade of the House 
Committee on Ways and Means on May 14, 2009, provided an important 
opportunity to consider several of the key issues relating to 
investment protections and their importance for U.S. investors and the 
U.S. economy. I appreciated the opportunity to testify at that hearing 
and very much welcome the additional opportunity to provide further 
views on the proposals made at that hearing at the request of the 
Chairman and Members of Subcommittee during the hearing. These comments 
address the proposals set forth by Professor Stumberg and others during 
the hearing and in written testimony presented that day. These comments 
are meant to supplement my own written testimony, submitted in 
conjunction with the hearing, which provides important background 
information on these long-running debates.
    These additional views are submitted on behalf of the Emergency 
Committee for American Trade--ECAT--an association of the chief 
executives of leading U.S. business enterprises with global operations. 
ECAT was founded over four decades ago to promote economic growth 
through expansionary trade and investment policies. Today, ECAT's 
members represent all the principal sectors of the U.S. economy--
agriculture, finance, high technology, manufacturing, merchandising, 
processing, publishing and services. The combined exports of ECAT 
companies run into the tens of billions of dollars. The jobs they 
provide for American men and women--including the jobs accounted for by 
suppliers, dealers, and subcontractors--are located in every state and 
cover skills of all levels. Today, the annual sales of ECAT companies 
exceed $2.7 trillion, and the companies employ more than 6.4 million 
people.
    Professor Stumberg included numerous proposals in his written 
testimony, many of which were also raised and rejected during the 
drafting of the 2004 U.S. Model BIT. I will address each issue in turn. 
But first, these proposals should be placed in appropriate context.
    As you know, the investment-related negotiating provisions of the 
Bipartisan Trade Promotion Authority Act of 2002 \1\ directs U.S. 
negotiators to pursue strong investment protections. The Act was the 
product of vigorous debate, both in the House and Senate, and reflects 
a careful balancing of the United States' so-called ``offensive'' and 
``defensive'' interests with respect to cross-border investment. In 
view of this legislation, and in the interest of maintaining 
consistency between BITs (which, technically, were not covered by the 
2002 Act) and investment chapters in free trade agreements, in 2003 and 
2004 the Executive Branch undertook to revise the United States' Model 
BIT in accordance with the 2002 Act's investment negotiating 
objectives.
---------------------------------------------------------------------------
    \1\ Enacted as part of the Trade Act of 2002, Title XXI, Section 
2102(c), Pub. L. 107-210 (2002).
---------------------------------------------------------------------------
    I was an active private sector participant in the Administration's 
review of the Model BIT in 2003 and 2004, along with many other 
stakeholders. I can tell you that the debates were intense, that they 
included input from all stakeholders, and that the agreement that was 
ultimately forged reflected the input of all of these stakeholders. The 
same careful balancing of U.S. interests that was embodied in the Act 
was also reflected in the 2004 Model BIT.
    Many of the changes Professor Stumberg and others now propose were 
considered and debated during the last review. The compromise positions 
that were worked out, and that are embodied in the 2004 Model BIT, 
narrowed the legal protections available to U.S. investors abroad--a 
significant cost to ECAT companies and other globally active U.S. 
businesses. That compromise was the result of a careful weighing of 
offensive positions--the interest of U.S. investors in protecting their 
investments abroad and obtaining a remedy for any adverse treatment by 
foreign governments--and defensive positions--the concerns of certain 
domestic constituencies interested in minimizing the theoretical 
possibility of the United States being held liable for the adoption or 
enforcement of challenged measures (although, of course, this has not 
happened to date).
    Professor Stumberg's proposals would reopen these issues in order 
to further narrow, and weaken, the current legal protections available 
to U.S. investors abroad. These changes, which might look minor to a 
casual observer, would, in effect, constitute a dramatic reversal of 
longstanding, bipartisan U.S. policy. They would also put at risk 
billions of dollars of U.S. investment abroad, investment that provides 
strong benefits to the U.S. economy, U.S. economic activity, U.S. 
companies and U.S. workers.
    I now turn to address each of the proposals raised during the May 
14th hearing.
Selective Negotiation of Investor-State Dispute Settlement
    During the hearing, Professor Stumberg questioned the need for 
investor-state dispute settlement with certain countries, particularly 
with respect to the Korea-United States Free Trade Agreement (KORUS 
FTA) and bilateral investment treaty (BIT) negotiations with China. It 
was also suggested that the negotiation of binding investor-state 
dispute resolution provisions not be a consistent U.S. negotiating 
objective, but should depend on the adequacy of the other country's 
judicial system.\2\
---------------------------------------------------------------------------
    \2\ There was some discussion at the hearing that a forum non 
conveniens approach might be used to determine with which countries the 
United States should enter into a relationship with investor-state 
dispute settlement. This common law doctrine--that allows a court the 
discretion to reject jurisdiction over a case when it finds that 
another judicial forum is adequate, available and more appropriate--
generally focuses less on the adequacy of the other forum and more on 
the availability of witnesses and other evidence. This doctrine is 
simply not appropriate or viable to use as a proxy to pick and choose 
with which countries the United States should enter into an investment 
treaty with investor-state dispute settlement and would represent a 
step backwards in strong legal protections that are vitally important 
for U.S. investors overseas and the economic growth and opportunities 
that they support here in the United States.
---------------------------------------------------------------------------
    In fact, investor-state dispute settlement is vitally needed in 
both those cases, as well as in other ongoing and future negotiations, 
to ensure that U.S. companies have a level playing field in those 
markets and can ensure that the obligations that those other countries 
undertake can be fully enforced before neutral tribunals.
    Notably, both Korea and China have concluded BITs with other OECD 
member countries that incorporate investor-state dispute settlement, 
and the United States and its investors should not be treated any 
differently.

          Korea, for example, has BITs in place with investor-
        state dispute settlement with the following major developed 
        countries: Austria, Belgium, the Czech Republic, Denmark, 
        Finland, Germany, Italy, Japan, the Netherlands, Spain, Sweden, 
        and the United Kingdom.
          China has BITs in place with investor-state dispute 
        settlement with Finland, Germany, and the Netherlands and trade 
        agreements with investment chapters and investor-state dispute 
        settlement with Singapore, among other major countries.

    As explained at the hearing, the United States has far fewer BITs 
than most other major capital exporting nations. Removing investor-
state arbitration from the Korea-U.S. FTA or excluding it from an 
eventual U.S.-China BIT would put U.S. investors and their workers at a 
disadvantage vis-a-vis competitors from other countries with which 
Korea and China have treaties, including those in Europe and Asia.
    Investor-state dispute settlement is a vital tool for U.S. 
investors to ensure a level playing field in foreign countries, many of 
which, like Korea and China, have maintained significant barriers to 
foreign investment. In these and many other countries, the investment 
commitments in these instruments are not reflective of the country's 
own domestic legal protections and investor-state dispute settlement 
would provide the only way for investors to ensure that countries keep 
their commitments to these basic standards. ECAT was very disappointed 
that the investor-state dispute settlement process was not included in 
the U.S.-Australia FTA. Obviously, U.S. investors will still have 
recourse to Australia's legal system and its respected judiciary, but 
U.S. investors lack the ability to take all of the same types of claims 
that would have been available under the FTA before Australia's own 
court system. Australia's refusal to accept this provision, 
particularly after it was included in Australia's FTA with Singapore, 
puts U.S. companies at a competitive disadvantage. ECAT notes that the 
FTA contemplates that the availability of an investor-state dispute 
settlement mechanism can be revisited.
    The investor-state mechanism also has the important benefit of 
allowing claims to proceed in a de-politicized manner. Before the 
advent of investor-state dispute settlement, U.S. investors would need 
to request the State Department to espouse their claims on their 
behalf. Unlike other dispute settlement processes in an FTA or the WTO 
where oftentimes entire industries are affected, the espousal of an 
individual investor's claim elevates an essentially private dispute to 
a political and diplomatic one, raising unnecessary irritants in 
foreign relations. From the perspective of investors, relying solely on 
the government to espouse their claims will most often lead to no claim 
being brought as governments have larger issues to address with their 
foreign counterparts.
    Investor-state dispute settlement is both vital and appropriate for 
investors given that investors have a unique relationship with capital 
at risk in the foreign territory of another government. Notably, an 
investor's rights are limited to bringing investment claims only before 
an investor-state dispute settlement panel, not other claims that might 
fall under a broader trade agreement. The proposal raised at the 
hearing by Ms. Lee that non-investor stakeholders in an FTA should have 
similar rights to bring individual actions against a foreign government 
for non-investment claims is neither feasible, nor appropriate. 
Notably, an investor acquires legal rights in that foreign country as 
result of its investment, rights that other stakeholders who are not 
investors simply does not have. No international instrument creates 
such a private right for non-investors, and it is not clear that any 
government, including the U.S. government, would agree to create a new 
right of action for a class of stakeholders that do not have the 
relationship that an investor has by virtue of its investment in a 
foreign territory, an investment that brings with it domestic legal 
rights.
Minimum Standard of Treatment
    In his written testimony, Professor Stumberg proposes to ``[n]arrow 
the minimum standard to the elements of customary international law as 
explained in the U.S. brief in Glamis.'' The United States, in its 
Counter-Memorial in the  Glamis case, suggests that minimum standards 
of State conduct have been established ``in only a few areas,'' citing 
as examples the requirements: (1) to provide the ``customary 
international law obligation of full protection and security;'' and (2) 
to ensure that a ``denial of justice'' does not occur. As a preliminary 
matter, the U.S. Counter-Memorial does not, as Professor Stumberg 
appears to suggest, set forth an exhaustive list. Like the 2004 Model 
BIT discussed below, the U.S. Counter-Memorial provides these as 
examples.
    Professor Stumberg's proposal is an overly narrow interpretation of 
customary international law and its adoption would be detrimental to 
U.S. interests.
    One of the effects of Professor Stumberg's proposal would be to 
significantly narrow the minimum standard of treatment, particularly 
the fair and equitable treatment standard included in the 2004 Model 
BIT. While the 2004 Model BIT provides that fair and equitable 
treatment includes the obligation not to deny justice, it lists denial 
of justice as only one example. Thus, the Model BIT allows for other 
elements of the fair and equitable treatment standard--e.g., an 
investor's legitimate expectations created by government commitments--
to be considered as part of the minimum standard of treatment. 
Professor Stumberg's proposal would eliminate this possibility, which 
is a widely accepted part of customary international law.
    Further, by defining the minimum standard of treatment to include 
only those principles of customary international law specifically 
identified in the Glamis brief, the United States would forgo the 
benefits of the evolutionary nature of customary international law. As 
BITs proliferate, and state practice improves (often led by the example 
of the United States), the minimum standard of treatment required by 
international law continues to evolve. U.S. investors abroad would thus 
be deprived of the evolution of these protections in the years to come.
    Professor Stumberg's concern appears to be that the ``minimum 
standard of treatment'' prescribed by customary international law could 
be greater than the protections guaranteed under U.S. law. The risk 
that Professor Stumberg has identified is negligible. As I discussed in 
my written testimony, and at the hearing, the United States already 
provides strong protections both to its own citizens and to foreign 
investors, who have full rights to use our courts and seek the 
protection of our Constitution and other governing laws. The 
protections are embodied in the Takings, Due Process and Equal 
Protection Clauses of the Fifth and Fourteenth Amendments to the 
Constitution, the Administrative Procedure Act (APA), as well as other 
U.S. laws that establish strong protections for U.S. property rights in 
the United States. These laws protect U.S. citizens and foreign 
investors alike.
    In fact, Congress recognized the strength of U.S. protections in 
the Report of the Senate Committee on Finance on the investment 
negotiating objectives contained in the 2002 Act. Specifically, as I 
noted in my written testimony, that Report found that ``protections of 
investor rights under U.S. law generally equal or exceed international 
law standards (including the non-discrimination and investment 
protection obligations described above).'' \3\
---------------------------------------------------------------------------
    \3\ Report 107-139 of the Senate Committee on Finance, Bipartisan 
Trade Promotion Authority Act of 2002 (H.R. 3005) at 13 (emphasis 
added).
---------------------------------------------------------------------------
    Such protections, however, often do not exist in host countries 
where U.S. companies and individuals invest. Ironically, the State 
Department seemed to recognize this in Glamis. As the State Department 
explained, ``a minimum standard of treatment is necessary where 
protections under treaty-based national treatment obligations do not 
adequately protect aliens because the host State treats it own 
nationals unjustly or egregiously, and accords aliens like treatment.'' 
\4\ Providing broad, not narrow, investment protections--including 
under the fair and equitable treatment standard--provides an important 
check against such unfair treatment of U.S. investors, while posing no 
appreciable risk to the United States.
---------------------------------------------------------------------------
    \4\ U.S. Counter-Memorial, Glamis Gold Ltd., v. United States of 
America, September 19, 2006, at p. 220.
---------------------------------------------------------------------------
Expropriation
    Professor Stumberg proposes that the U.S. should ``[n]arrow 
indirect expropriation so that it does not apply to nondiscriminatory 
regulations as explained in the  Methanex award.'' Methanex provides, 
in pertinent part, that ``a non-discriminatory regulation for a public 
purpose, which is enacted in accordance with due process and which 
affects, inter alia, a foreign investor or investment is not deemed 
expropriatory and compensable. . . .'' \5\ Professor Stumberg's 
proposal would significantly narrow an investor's rights and would be 
inconsistent with international law.
---------------------------------------------------------------------------
    \5\ Methanex Corporation v. United States of America, Final Award 
of the Tribunal on Jurisdiction and Merits, August 3, 2005, at Part 
IV--Chapter D, para. 7.
---------------------------------------------------------------------------
    Of course, it is the right of a sovereign government to take 
private property, provided that it is taken for a public purpose, in a 
non-discriminatory manner, on payment of prompt, adequate, and 
effective compensation, and in accordance with due process of law. This 
is the recognized standard under customary international law, and under 
U.S. law as well. The government may do so directly--e.g., by 
exercising eminent domain--or indirectly--e.g., by exercising 
regulatory authority. International and domestic law recognizes that 
indirect expropriation requires compensation because a government 
measure can impair the value of property to such an extent as to be 
equivalent to a direct taking.
    Professor Stumberg's proposal would limit the right to compensation 
for indirect expropriation to measures that are discriminatory or serve 
illegitimate purposes. This would be inconsistent with customary 
international law, (and, in most cases, domestic law), which does not 
limit compensation to improperly motivated government takings of 
property. In fact, under international and domestic law, a government's 
motives are largely irrelevant for determining whether expropriation 
has occurred. Even when the government takes property for the most 
noble of public purposes, compensation may be owed to those whose 
property is taken. Indeed, as provided in Annex B--Expropriation of the 
2004 Model BIT, which itself was based on the landmark U.S. Supreme 
Court case Penn Central Transp. v. New York City,\6\ the analysis of 
whether there has been a compensable indirect expropriation is a case-
by-case analysis where the following factors, among others, are 
considered:
---------------------------------------------------------------------------
    \6\ 438 U.S. 104 (1978).

          The economic impact of the government action;
          The extent to which the government action interferes 
        with distinct, reasonable investment-backed expectations; and
          The character of the government action.

    Professor Stumberg's suggestion reflects a concern expressed by 
some that rules prohibiting indirect expropriation somehow discourage 
or prevent proper government regulation of labor standards or the 
environment. International businesses recognize that it is an important 
right and duty of sovereign governments to regulate labor and 
environmental standards. The purpose of the indirect expropriation 
provision (and of the Takings Clause of the U.S. Constitution,\7\ as 
well) is not to discourage regulation, but simply to ensure that 
regulations do not force one set of investors to bear the full costs of 
regulations that should be borne by society as a whole.
---------------------------------------------------------------------------
    \7\ See, e.g., Penn Central Transp. v. New York City, 438 U.S. 104 
(1978); Lucas v. South Carolina Coastal Council, 505 U.S. 1003, 1018 
(1992).
---------------------------------------------------------------------------
    In any case, there is no need to amend the 2004 Model BIT, which 
already provides significant limitations on an investor's right to 
claim compensation for indirect expropriation. According to Annex B of 
the 2004 Model BIT, ``non-discriminatory regulatory actions by a Party 
that are designed and applied to protect legitimate public welfare 
objectives, such as public health, safety, and the environment, do not 
constitute indirect expropriations,'' except in ``rare circumstances.''
    Further modification to that language is simply not warranted. As I 
warned at the hearing, proposals that would create a safe harbor for 
government regulation for environmental or other public purposes would 
put in jeopardy important U.S. national economic and other policy 
goals. Exempting environmental government regulation, for example, 
would allow other governments to expropriate U.S. environmental 
technology with impunity, undermining the ability of U.S. companies to 
create and maintain green jobs here in the United States and to develop 
innovative new technologies.
Definition of Investment
    Professor Stumberg proposes to narrow the definition of investment 
in the 2004 Model BIT, which he claims currently ``extends beyond the 
kinds of property that are protected by the takings clause of the U.S. 
Constitution.'' By tying the treaty definition of investment to the 
Constitution's Takings Clause, Professor Stumberg's intent appears to 
be to limit the type of property that can be expropriated. However, the 
current provisions of the 2004 Model BIT already adequately address 
these concerns.
    The protections against expropriation only apply if government 
action ``interferes with a tangible or intangible right or property 
interest in an investment.'' \8\ This restrictive language was 
introduced into the 2004 Model BIT based on the U.S. Constitution's 
Takings Clause jurisprudence. Earlier U.S. BITs defined expropriation 
in terms of ``investment'' (not in terms of ``property'') and thus 
provided a broader scope of coverage for U.S. investors overseas.
---------------------------------------------------------------------------
    \8\ 2004 Model BIT at Annex B.
---------------------------------------------------------------------------
    ECAT remains concerned that this 2004 change in language was itself 
unnecessary, given the already broad U.S. jurisprudence under the 
Takings Clause defining what constitutes property more broadly than 
many other jurisdictions or than Professor Stumberg suggests. The 
primary effect of further restrictions on the definition of investment 
is not to change the protections available to foreign investors here in 
the United States. The primary effect is that other countries, which 
have much more restrictive definitions of property interests than the 
United States, will have leeway to deny full protection for U.S. 
investors overseas.
Denial of Benefits to Subsidiaries of U.S. Corporations
    Professor Stumberg proposes that the 2004 Model BIT be revised to 
``[l]imit `denial of benefits' language so as to preclude claims by 
subsidiaries of U.S. corporations.'' Professor Stumberg's proposal 
could be interpreted in one of two ways. It could mean that no 
protections under the U.S. Model BIT should be provided to shell 
corporations owned and controlled by U.S. parent companies. It could 
also mean that no subsidiary of any kind of a U.S. corporation could 
receive protections under the Model BIT.\9\
---------------------------------------------------------------------------
    \9\ As phrased, it could even mean that U.S. subsidiaries of U.S. 
corporations could not invoke a U.S. BIT against a foreign government. 
I assume that that is not what he means given that such a result would 
negate the benefits of a BIT for the United States.
---------------------------------------------------------------------------
    If Professor Stumberg proposes to preclude claims against the 
United States by nominally foreign shell companies, where the ultimate 
owners and investors are actually U.S., not foreign, corporations, such 
a revision is unnecessary. The current Model BIT already allows the 
United States to deny the treaty's protections to such shell company 
foreign investors. Specifically, Article 17(2) of the 2004 Model BIT 
provides that a party may deny benefits under the BIT to an enterprise 
of the other party, or to investments of that investor, if the 
enterprise ``has no substantial business activities in the territory of 
the other Party'' and persons of a non-party or of a denying party 
``own or control the enterprise.'' In other words, the United States 
can deny BIT benefits to nominally foreign companies that are mere 
shells and that are actually owned by U.S. investors. This provision 
already protects the United States against such shell company claims.
    If, on the other hand, Professor Stumberg wishes to preclude 
legitimate subsidiaries of U.S. corporations that are incorporated in 
and do business in other countries from being able to avail themselves 
of the protections afforded under the 2004 Model BIT when they invest 
in the United States, Professor Stumberg's proposal would impact a 
striking range of companies. This is true in particular given the 
interconnected nature of the global economy and of the corporate 
structures of multinational companies. There is no reason, however, to 
deny such companies the BIT's protections. If they are legitimate 
foreign corporations with substantial business activity in the 
territory in which they are incorporated, the protections afforded 
under the 2004 Model BIT should apply, whether or not there is a U.S. 
entity somewhere to be found in their corporate structure. Any contrary 
rule would ignore the distinct legal personality an entity acquires 
when it establishes a presence in another territory and does business 
in that territory. Notably, the theoretical concern that allowing such 
subsidiaries to pursue investor-state dispute settlement would result 
in an onslaught of cases against the United States has, of course, 
never materialized with any country, since the United States entered 
into its first BIT in 1983.
Emergency Stabilization Measures
    Professor Stumberg argues that the 2004 Model BIT should be revised 
to incorporate ``the NAFTA prudential exception as a model to safeguard 
emergency stabilization measures.'' This revision is unnecessary from a 
defensive point of view, and it threatens to subject U.S. investors 
abroad to unfair and unpredictable discrimination.
    From a defensive perspective, addition of a NAFTA-style prudential 
exception for emergency stabilization measures is unnecessary because 
the United States may already take appropriate stabilization measures 
pursuant to Article 20 of the 2004 Model BIT, without risk of claims 
from foreign investors.
    Article 20 provides that ``a Party shall not be prevented from 
adopting or maintaining measures relating to financial services for 
prudential reasons, including for the protection of investors, 
depositors, policy holders, or persons to whom a fiduciary duty is owed 
by a financial services supplier, or to ensure the integrity and 
stability of the financial system.'' A footnote further clarifies that 
``[i]t is understood that the term `prudential reasons' includes the 
maintenance of the safety, soundness, integrity, or financial 
responsibility of individual financial institutions.''
    Article 20 provides that disputes arising under the prudential 
carve-out are to be settled by consultations between the two states, 
and, if necessary, state-to-state arbitration that is binding on any 
subsequent investor-state arbitration. A broader exception simply is 
not necessary to protect the United States' defensive interests.
    Further, a broader NAFTA-style exception would potentially subject 
U.S. investors to unfair and discriminatory treatment abroad, by 
broadening the opportunity provided for a foreign government to take 
adverse action against a U.S. investor. The government would only need 
to state that the measure taken was ``reasonable'' in order to be able 
to deny U.S. investors protections afforded under the BIT. The 
prudential measures exception under NAFTA must be understood in 
context. It is part of a separate, detailed set of reciprocal 
commitments involving the financial services sector. There is no basis 
for such a broad exception in the U.S. Model BIT.
Capital Controls
    Professor Stumberg proposes that the 2004 Model BIT be amended to 
``[a]llow countries to impose capital controls in response to a 
financial crisis.'' There is no defensive justification for such a 
provision. More importantly, the overwhelming consensus of economists 
is that encouraging capital controls would be devastating both for U.S. 
investors abroad and for the domestic markets in which capital controls 
are implemented.
    This issue was carefully debated in the development of the 2004 
Model BIT. There is no reason to reopen the debate now. Article 7, 
which provides that each party ``shall permit all transfers relating to 
a covered investment to be made freely and without delay into and out 
of its territory,'' appropriately reflects the fact that capital 
controls generally increase the risk that investors face and discourage 
foreign investment flows that BITs are designed to facilitate. 
Additionally, Article 7 already recognizes that a government may impose 
certain limitations on the right to transfer investment returns, such 
as when the government applies its bankruptcy, securities trading, or 
criminal laws, so long as the laws are equitable, non-discriminatory 
and applied in good faith.
Exhaustion of Local Remedies
    Professor Stumberg proposes that the U.S. Model BIT should be 
revised to ``require investors to exhaust domestic remedies before 
using investor-state arbitration.'' Such a proposal would introduce 
unnecessary costs and delay into the process, and would run contrary to 
current international legal practice, undoing a half-century of 
progress in international law.
    As with many of Professor Stumberg's proposals, the question of 
whether to require investors to first seek domestic remedies was 
carefully considered during the drafting of the 2004 Model BIT. The 
proposal was rejected. Importantly, requiring the exhaustion of local 
remedies adds unnecessary cost and delay to the dispute resolution 
process. It is expensive to bring a lawsuit in local courts--the 
investor has to hire local counsel and prepare a case, and, in some 
instances, pursue a trial. In the United States this can take years and 
cost millions of dollars. In countries with less sophisticated legal 
systems, this could take decades.
    More importantly, however, requiring that investors return to a 
system of mandatory local proceedings would require a U.S. investor to 
seek first to resolve the dispute through foreign local courts. But 
foreign law (unlike U.S. law) may not incorporate any of the BIT's 
protections, making the requirement to resort to local courts a 
fruitless exercise. The key objective of the U.S. BIT network is to 
provide U.S. investors with legal protections that may not otherwise 
exist in the foreign country. A requirement to resort first to local 
courts would also deprive an investor of a neutral forum where its 
claims can be heard, which lies at the heart of investor-state 
arbitration. International law has steadily progressed away from 
requiring the exhaustion of local remedies. A return to that system 
would be damaging to the investment climate, and would represent a 
remarkable regression of international law in an area where the United 
States has done so much to promote progress.
Diplomatic Review
    Professor Stumberg proposes that the 2004 Model BIT should be 
amended to ``[e]nable a country to block a claim in sensitive sectors 
or to clarify the self-judging nature of key exceptions for security 
and prudential measures.'' As a general matter, exceptions to 
investment protections should be limited in number and narrowly 
defined. Otherwise, such exceptions could be used to erode important 
investor protections.
    This is particularly true, for example, with respect to the first 
half of what Professor Stumberg proposes--i.e., enabling a country to 
block a claim in so-called ``sensitive sectors.'' Such a proposal is 
rife with the potential for abuse. It would allow a government to 
identify any sector in the economy as a ``sensitive sector'' and, 
accordingly, to block a claim against it in that sector. Singling out 
particular sectors would provide other governments the same ability to 
do so, with the result that those sectors of the economy with the most 
valuable foreign investment would be least likely to be protected. 
Consider the case of Venezuela, which is expropriating U.S. investment 
in a number of different sectors which it considers sensitive.
    Requiring reviews and allowing countries to designate sensitive 
sectors would change what should be a private dispute to a politicized 
one, as governments would weigh in with each other to try to stop cases 
from going forward. This type of review would negate one of the 
purposes of investor-state dispute settlement to keep private disputes 
private and non-politicized.
    In addition, the second half of Professor Stumberg's proposal--
i.e., clarifying the self-judging nature of exceptions for security and 
prudential measures--is unnecessary given the security exception in 
Article 18 and the broad prudential measures exception in Article 20 of 
the 2004 Model BIT. With respect to the essential security exception, 
the 2004 Model BIT provides a country with the ability to take actions 
``that it considers necessary for the fulfillment of its obligations 
with respect to the maintenance or restoration of international peace 
or security, or the protection of its own essential security 
interests.'' The addition of the phrase ``that it considers necessary'' 
significantly broadens the exception beyond that which was contained in 
the 1996 Model BIT. Indeed, ECAT is concerned that this language may be 
misconstrued and misused to allow foreign governments to evade 
responsibility in cases that do not involve essential security 
interests or in cases in which the foreign government's policies 
created the perceived threat to essential security interests. The 
result is that the United States faces no constraints in its ability to 
enact reasonable measures necessary for its national security. From a 
defensive point of view, this is as strong a position as possible.
    In addition, and as I already discussed above, Article 20 provides 
a broad exception for countries to implement measures relating to 
financial services for ``prudential reasons'' or ``to ensure the 
integrity and stability of the financial system.'' Thus, the United 
States has also reserved for itself the discretion necessary to enact 
prudential measures without stating that it can self-judge when the 
exercise of discretion is justified. If a measure is truly necessary to 
ensure the integrity of the financial system, the United States will be 
able to demonstrate the necessity of such a measure not only on a 
subjective but also an objective basis. Moreover, the omission of self-
judging language in Article 20 protects U.S. investors abroad. Were the 
provision self-judging, it could allow host governments to discriminate 
against U.S. investors without limit under the guise of the prudential 
measures exception.
Investment Court
    Professor Stumberg suggests that it is necessary to ``[e]stablish 
stronger conflict of interest standards for arbitrators and eventually 
replace private arbitrators with an investment court that uses 
independent judges with tenure.'' Professor Stumberg's proposals are 
unnecessary and would infringe on the party-driven nature of 
arbitration.
    Professor Stumberg's conflict of interest proposal appears to be a 
solution without a problem. The current conflict of interest rules 
work. Generally, the government and the investor each select an 
arbitrator and then those two arbitrators select a third person to 
serve as the presiding arbitrator. The appointed arbitrators must 
disclose all actual and potential conflicts, and each side has an 
opportunity to challenge the appointed arbitrators. Where genuine 
concerns have been raised, arbitrators generally have stepped down or 
have been replaced.
    To the extent Professor Stumberg's proposal for an investment court 
stems from a concern over inconsistent awards, such concerns have 
proven over time to be unfounded. The threat of divergent and 
inconsistent awards has not materialized. There is no need for a 
standing body to impose consistency, which instead emerges as more 
cases are decided over time.
Private Right of Action
    Professor Stumberg's suggestion that implementing legislation be 
enacted to ``[e]nsure that BITs do not create a private right of action 
for investors to enforcing their treaty rights in U.S. courts'' is 
unnecessary and inappropriate. Professor Stumberg's proposal is 
unnecessary because under U.S. law a treaty does not create rights that 
may be enforced in U.S. courts unless it is (i) self-executing or (ii) 
Congress creates such rights through legislation. No U.S. court of 
which I am aware has made such a determination with respect to a U.S. 
BIT or FTA investment chapter. Indeed, there is no evidence that 
investors have successfully prosecuted any such claims or are seeking 
to use U.S. courts over arbitration panels to bring BIT claims. Even if 
such claims were raised, that is a matter for the judiciary and does 
not require additional changes to the BIT text or U.S. implementation 
of a BIT. Like many of the proposals raised, this is a solution lacking 
a problem.
    This proposal is also problematic in relation with the exhaustion 
of local remedies proposal also made by Professor Stumberg. While 
foreign investors in the United States still have the benefit of strong 
legal protections under the U.S. legal system regardless of a BIT, the 
same is not true for U.S. investors overseas. While Professor 
Stumberg's proposal only applies to the United States, it would be 
likely for any negotiating partner of the United States to follow the 
same approach which, if combined with the exhaustion of local remedies 
proposal, would preclude U.S. investors from having the benefits of the 
protections negotiated. That is, U.S. investors would, on the one hand, 
be required to exhaust local remedies and, on the other, be precluded 
from enforcing their rights in those local courts.
Federal Preemption
    Professor Stumberg's final proposal is that Congress should 
``[e]stablish protections against federal preemption and unfunded 
federal mandates that BITs and FTAs can impose on states as a result of 
investment disputes.'' The assumptions underlying Professor Stumberg's 
proposal are incorrect. Any award that might someday be rendered in 
favor of an investor would run against the U.S. Federal Government, not 
against any state or locality. As well, it is the U.S Department of 
State's Office of the Legal Advisor that handles the claim for the 
United States, just as if the claim had been brought on the basis of a 
federal law, not on the basis of state or local law. Input and 
information is sought from states and localities, but no significant 
burden is placed on them to defend their own laws or actions. In 
addition, investment treaty tribunals do not require host governments 
to change their laws. Rather, if they find for an investor, an arbitral 
tribunal awards monetary compensation. Thus, there appears to be no 
need for the putative ``protections'' proposed by Professor Stumberg.
    Seeking to create a blanket carve out for state and local action, 
however, would undermine a major benefit of the BIT--the protection 
that U.S. investors seek to obtain in foreign states, provinces and 
localities. The United States simply would not be able to negotiate a 
one-sided agreement, covering its federal actions only, while covering 
the foreign government's central and sub-central government actions. 
Failing to have such coverage would greatly diminish the value of the 
investment instrument for the United States, since U.S. investors 
oftentimes find themselves the subject of discriminatory, unfair or 
expropriatory actions at the sub-central level.
Conclusion
    On behalf of ECAT, I appreciate the opportunity to provide these 
additional comments. As the Administration undertakes its review of the 
2004 Model BIT, ECAT looks forward to working with you, the Congress 
and the Administration in support of international investment 
instruments that continue to expand the benefits for our economy, our 
industries, our workers and our broader national interest.
    As discussed at the hearing and in written testimony, the 2004 
Model BIT represents a substantial modification from the earlier 1994 
Model. It incorporated provisions that narrowed the scope of key 
protections to address many of the same concerns that were raised again 
at the May 14th hearing.
    The proposed changes discussed herein seek to address theoretical 
concerns that have not materialized either before or after the 2004 
Model BIT was adopted. Indeed, most of these proposals were made at the 
time of the last BIT review and were rejected. Adoption of these 
changes going forward would weaken core investment protections at the 
expense of U.S. companies and their workers, to the detriment of U.S. 
economic interests. ECAT strongly urges that changes to the 2004 Model 
BIT be considered carefully and promote stronger, not weaker, 
protections for U.S. investors overseas.
                                 
                   Statement of Mark Hudson Botsford
    I am a U.S. citizen who recently returned home to Washington, D.C., 
after spending many years in Argentina, as a private business 
consultant. I invested in local Argentine Treasury Bills, in October 
2001, prior to the declaration of the largest sovereign debt default in 
history. After the default was declared, I found comfort in the fact 
that the IMF has a lending into arrears article, which declared that 
any country in default, must enter into good faith negotiations with 
all of its creditors in a transparent forum to determine capacity and 
willingness in any restructuring. Unfortunately, my hopes were dashed 
as the U.S. government supported the Argentine government and failed to 
insist on these negotiations, thereby allowing Argentina to extend 
deadlines on loans. In 2005, the SEC approved the restructuring 
process, as the majority of bonds were issued under New York State 
Court Jurisdiction. Again, the SEC failed to use precedent, and signed 
off on the largest haircut ever proposed, 70%. I did not enter the 
voluntary restructuring and am presently awaiting a new offer from the 
Argentine authorities. In 2006, the CRS submitted a report to Congress 
on this restructuring, which stated that the creditors were unable to 
generate much sympathy from Congress. As the CRS points out, I believe 
this is due to the fact that, by then, the nature of the creditors had 
changed. Prior to the default of December, 2001, Argentina had 
succeeded in aggressively marketing its debt for the first time to 
individuals in addition to institutions. After the default, since 
neither the U.S., through the IMF nor the SEC were effective in 
protecting U.S. investors overseas, the majority of these individuals 
sold their holdings at a big loss to large commercial banks and hedge 
funds. I have returned to seek a non legal solution to the problem of 
Argentina's continuing default, and to try to impede other countries, 
such as Ecuador, from following in her footsteps. However, one avenue I 
will not proceed on, is that which is afforded to me by the breach of 
the U.S. Argentina BIT. It is much too costly and time consuming, and 
even if I get a ruling in my favor, the lack of enforcement provisions 
make any effort in this regard fruitless. The Argentine successfully 
characterizes her creditors as vulture funds and opportunistic 
international banks. The reality was that individual investors, such as 
myself, saw their life savings evaporate, while the international 
community looked the other way. In a time when major banks and 
multinationals are teetering on bankruptcy, we should not be seen as 
promoting sovereign debt defaults around the world.
                                 
                    Statement of Sarah Anderson \1\
---------------------------------------------------------------------------
    \1\ Sarah Anderson is the Director of the Global Economy Project at 
the Institute for Policy Studies in Washington, DC, and a co-author of 
the books Field Guide to the Global Economy and Alternatives to 
Economic Globalization.  In 1998 and 1999, she served on the staff of 
the bipartisan International Financial Institutions Advisory Commission 
(the ``Meltzer Commission''). Contact: tel: 202 234 9382, email: 
[email protected].
      See, for example: Sarah Anderson, ``Policy Handcuffs in Financial 
Crisis: How U.S. Trade and Investment Policies Limit Government Power 
to Control Capital Flows,'' Institute for Policy Studies, February 2009 
(http://www.ips-dc.org/getfile.php?id=329) and Sarah Anderson and Sara 
Grusky, ``Challenging Corporate Investor Rule,'' Institute for Policy 
Studies and Food and Water Watch, April 2007 (http://www.ips-dc.org/
getfile.php?id=146).
---------------------------------------------------------------------------
    Thank you for the opportunity to submit comments on this important 
issue. I share many of the concerns raised by other witnesses regarding 
the investment protections in U.S. trade and investment agreements. As 
the Director of the Global Economy Project at the Institute for Policy 
Studies, I have published several relevant reports, drawing on 
interviews with policymakers and legal experts, as well as individuals 
directly affected by investor-state cases in the United States and 
several other countries. My overall view is that reforms of these rules 
are needed to correct the current imbalance between the broad public 
interest and the interests of private foreign investors.
    This testimony focuses on one particular set of investment 
protections--the provisions that restrict the use of capital controls. 
Particularly in light of the current global financial crisis, these 
provisions deserve much greater attention. My testimony can be 
summarized with the following three points, elaborated in detail below:

          1. The capital control restrictions in U.S. trade agreements 
        and bilateral investment treaties are outmoded.  Particularly 
        since the Asian financial crisis of the late 1990s, there has 
        been growing consensus among noted economists that such 
        measures, while not a panacea, can be effective tools for 
        preventing and responding to financial instability.
          2. Allowing other governments the authority to apply sensible 
        capital controls is in the interest of the United States.  In a 
        globalized world, expanding the policy options to combat 
        financial crisis makes sense for U.S. businesses, workers, and 
        the environment. Eliminating the preferential treatment for 
        foreign investors in current capital transfer rules could also 
        help prevent foreign policy conflicts.
          3. Capital control provisions are ripe for reform.  The 
        current crisis has opened an important opportunity to construct 
        new rules and institutions that can prevent future crises and 
        advance stable, sustainable development. Allowing governments 
        greater flexibility to use capital controls would be one 
        important step towards that goal, and important precedents 
        exist that could point the way.

Detailed Discussion
1.  The capital control restrictions in U.S. trade agreements and 
        bilateral investment treaties are outmoded.
    The International Monetary Fund (IMF) abandoned its blanket 
opposition to capital controls after several countries used these 
measures effectively to avoid the worst impacts of the Asian crisis in 
the late 1990s.'' \2\ In recent years, the Fund has advised at least 
two countries, Bulgaria and Croatia, to strengthen one type of capital 
control, reserve requirements on capital inflows.\3\ And when Iceland 
imposed controls on capital outflows in the aftermath of the country's 
banking sector meltdown, the IMF advised the government ``not to lift 
these restrictions before stability returns to the foreign exchange 
market.'' \4\
---------------------------------------------------------------------------
    \2\ Akira Ariyoshi, Karl Habermeier, Bernard Laurens, Inci Otker-
Robe, Jorge Ivan Canales-Kriljenko, and Andrei Kirilenko, ``Capital 
Controls: Country Experiences with Their Use and Liberalization,'' 
International Monetary Fund, May 17, 2000. http://www.imf.org/external/
pubs/ft/op/op190/index.htm.
    \3\ Daria Zakharova, ``One-Size-Fits-One: Tailor-Made Fiscal 
Responses to Capital Flows,'' International Monetary Fund, December 
2008. http://www.imf.org/external/pubs/ft/wp/2008/wp08269.pdf.
    \4\ International Monetary Fund, ``Interview with IMF mission chief 
for Iceland, Poul Thomsen,'' December 2, 2008. http://www.imf.org/
external/pubs/ft/survey/so/2008/INT111908A.htm.
---------------------------------------------------------------------------
    A March 2009 IMF report notes that ``The existence of capital 
controls in several countries and structural factors have helped to 
moderate both the direct and the indirect effects of the financial 
crisis.'' \5\ Former IMF chief economist Kenneth Rogoff underscored 
this point in a New York Times article about India, in which he stated 
that the country's stringent capital controls were helping to insulate 
that nation from the current crisis.\6\
---------------------------------------------------------------------------
    \5\ International Monetary Fund, ``The Implications of the Global 
Financial Crisis for Low-Income Countries,'' March 2009. http://
www.imf.org/external/pubs/ft/books/2009/globalfin/globalfin.pdf.
    \6\ Kenneth Rogoff, ``Rogoff: The Exuberance of India,'' New York 
Times, January 31, 2009. http://dealbook.blogs.nytimes.com/2009/01/31/
rogoff-the-exuberance-of-india/.
---------------------------------------------------------------------------
    Columbia University economist Jagdish Bhagwati, a strong advocate 
of trade liberalization, and many others have pointed out that there is 
little to no evidence that capital account liberalization is necessary 
for developing countries to attract foreign investment. In fact, six of 
the top ten non-OECD foreign direct investment recipients (China, Hong 
Kong, Russia, Brazil, Saudi Arabia, and India) have never signed a U.S. 
agreement restricting capital controls.\7\ In Congressional testimony, 
Bhagwati charged that the inclusion of capital control restrictions in 
trade agreements ``seems therefore to be ideological and/or a result of 
narrow lobbying interests hiding behind the assertion of social 
purpose.'' \8\
---------------------------------------------------------------------------
    \7\ UNCTAD, World Investment Report 2008.
    \8\ Jagdish Bhagwati, ``U.S. House of Representatives Committee on 
Financial Services Testimony Subcommittee on Domestic and International 
Monetary Policy, Trade and Technology,'' April 1, 2003. http://
www.columbia.edu/jb38/testimony.pdf.
---------------------------------------------------------------------------
    Rogoff and Bhagwati are among a growing number of prominent 
economists who are speaking out in support of allowing governments the 
authority to impose capital controls, including Nobel Prize winners 
Joseph Stiglitz and Paul Krugman, Harvard University's Dani Rodrik, and 
former President of the International Economic Association Guillermo 
Calvo.\9\
---------------------------------------------------------------------------
    \9\ See box of quotes from noted economists on pages 10-11 of the 
report ``Policy Handcuffs in Financial Crisis: How U.S. Trade and 
Investment Policies Limit Government Power to Control Capital Flows,'' 
by Sarah Anderson, Institute for Policy Studies, February 2009. http://
www.ips-dc.org/getfile.php?id=329.
---------------------------------------------------------------------------
2.  Allowing governments the authority to use sensible capital controls 
        is in the economic and foreign policy interest of the United 
        States.
    Businesses, workers, and the environment in this country are 
undermined by instability in other parts of the world, as crisis 
countries purchase fewer U.S. products, cut environmental spending, and 
expand the global pool of unemployed labor. And when governments are 
constrained in their use of capital controls, they have few other tools 
to prevent speculative bubbles or stem panic-driven capital flight. 
Mexico, for example, has extremely limited authority to apply capital 
controls under the investment rules in the North American Free Trade 
Agreement. In the face of massive capital flight (foreign investors 
withdrew more than $22 billion in the last few months of 2008),\10\ the 
government has struggled to prop up the value of its currency by 
auctioning off nearly 18 percent of its foreign reserves.\11\
---------------------------------------------------------------------------
    \10\ Roberto Gonzalez Amador, ``Inversionistas externos sacaron del 
pais $22 mil 190 millones,'' La Jornada, Dec. 18, 2008. http://
www.jornada.unam.mx/2008/12/18/index.php?section=economia
&article=024n1eco.
    \11\ http://www.businessweek.com/ap/financialnews/D94Q2SJ89.htm.
---------------------------------------------------------------------------
    Depleting reserves to fight devaluation not only reduces the funds 
available for development, it also raises the risk of even further 
capital flight, as low reserve levels undermine investor confidence. In 
another attempt to restore confidence, the Mexican government has 
opened a $47 billionline of credit with the IMF, raising the prospect 
of another debt crisis that could undermine development and stability 
in the United States' southern neighbor for many years to come.
    Daniel Tarullo, recently appointed to the Federal Reserve Board, 
has described the U.S. government's insistence on including capital 
control restrictions in trade agreements as not only ``bad financial 
policy and bad trade policy,'' but also ``bad foreign policy.'' \12\ In 
testimony during the debate over the Chile and Singapore free trade 
agreements in 2003, Tarullo laid out what would likely happen if a 
government bound by these rules were to use short-term capital controls 
during a severe financial crisis: ``As the country struggles to emerge 
from its recession . . . U.S. investors file their claims for 
compensation. And, of course, under the bilateral trade agreement they 
are entitled to that compensation. Thus the still-suffering citizens of 
the country are treated to the prospect of U.S. investors being made 
whole while everyone else bears losses from an economic catastrophe 
that has afflicted the entire nation. Regardless of what one thinks of 
the merits of capital controls, one would have to be naive not to think 
that an anti-American backlash would result.'' \13\
---------------------------------------------------------------------------
    \12\ Daniel Tarullo, ``Testimony before the Subcommittee on 
Domestic and International Monetary Policy, Trade and Technology, 
Committee on Financial Services, U.S. House of Representatives,'' April 
1, 2003. http://financialservices.house.gov/media/pdf/040103dt.pdf.
    \13\ Daniel Tarullo, ``Testimony before the Subcommittee on 
Domestic and International Monetary Policy, Trade and Technology, 
Committee on Financial Services, U.S. House of Representatives,'' April 
1, 2003. http://financialservices.house.gov/media/pdf/040103dt.pdf.
---------------------------------------------------------------------------
    This gloomy scenario has even greater resonance today, at a time 
when ordinary taxpayers here and around the world are being asked to 
shoulder the bulk of the risk and cost of financial recovery. This is 
an important time to ensure that international rules achieve a proper 
balance between the public interest and private financial interests.
3.  Capital control provisions are ripe for reform. 
    The investment rules in U.S. trade and investment agreements should 
be revised to allow governments greater flexibility to use capital 
controls as one tool for preventing or responding to financial 
instability. The following is a list of possible reforms, based on 
existing precedents.
    Dispute settlement: Given the sensitive context in which many 
governments turn to capital control measures, there is a strong 
argument that the right to investor-state dispute settlement should not 
apply to capital transfers provisions. At the very least, there should 
be a government screening process to examine investor claims and 
prevent those that would have a significantly negative impact on the 
public interest from moving forward. The U.S. model bilateral 
investment treaty sets a relevant precedent by requiring that 
appropriate authorities of the two governments make determinations that 
are binding on arbitral tribunals with regard to financial services and 
taxation-related claims.\14\
---------------------------------------------------------------------------
    \14\ 2004 U.S. Model Bilateral Investment Treaty. http://
www.ustr.gov/assets/Trade_Sectors/Investment/Model_BIT/
asset_upload_file847_6897.pdf.
---------------------------------------------------------------------------
    Balance of payments derogation: Many existing international 
agreements allow for restrictions on capital transfers in circumstances 
in which a host country is confronted with a balance of payments 
crisis. The World Trade Organization's General Agreement on Trade in 
Services, the OECD's Capital Movements Code, and the IMF's Articles of 
Agreement allow capital controls in such crisis periods, as long as 
they are temporary and non-discriminatory.\15\ In February 2009, the 
ASEAN nations also agreed to an investment agreement that includes a 
balance of payments safeguard, as well as an exception for 
circumstances in which ``movements of capital cause, or threaten to 
cause, serious economic or financial disturbance in the member state.'' 
\16\
---------------------------------------------------------------------------
    \15\ United Nations Conference on Trade and Development, ``Transfer 
of Funds,'' 2000. http://www.unctad.org/en/docs/psiteiitd20.en.pdf.
    \16\ ASEAN Comprehensive Investment Agreement, February 26, 2009. 
http://www.aseansec.org/22218.htm.
---------------------------------------------------------------------------
    Article 2104 of NAFTA also allows for temporary capital controls in 
times of ``serious balance of payments difficulties.'' \17\ However, 
the agreement includes two pages of conditions limiting the use of such 
measures, even in such crisis periods. For example, governments opting 
to use this policy tool must agree to enter into consultations with the 
IMF and adopt the Fund's policy recommendations on ``economic 
adjustment measures.'' This is extremely controversial, as the IMF has 
been widely criticized in past crises and in the current one for 
imposing anti-cyclical conditions, such as freezes in stimulatory 
social spending and unemployment benefits, tax increases, and service 
rate hikes. Capital control measures under NAFTA must also meet the 
legal standards of being ``no more burdensome than necessary'' and 
``avoid unnecessary damage'' to the interests of the other Party. Thus, 
while NAFTA technically offers a balance of payments exception, the 
hands of government officials are still quite tightly bound.
---------------------------------------------------------------------------
    \17\ North American Free Trade Agreement Final Text, Article 2104. 
http://www.nafta-sec-alena.org/en/view.aspx?x=343&mtpiID=155#A2104.
---------------------------------------------------------------------------
    Exceptions for crisis periods were further watered down in 
subsequent U.S. trade agreements and are completely absent from U.S. 
bilateral investment treaties. The governments of Singapore and Chile 
reportedly requested waivers for capital control rules during crisis 
periods in the U.S. trade agreements with those countries. The Bush 
administration refused, offering only to create special dispute 
settlement procedures for claims related to capital transfers. Under 
these procedures, foreign investors can still sue for damages over 
measures that ``substantially impede transfers''--they just need to 
wait an extra six months before filing their claims. A senior IMF legal 
counsel called the U.S. refusal to grant such a waiver ``draconian'' 
and complained that the rules might interfere with the IMF's own power 
to request that a government adopt capital controls.\18\
---------------------------------------------------------------------------
    \18\ Deborah Siegel, ``Using Free Trade Agreements to Control 
Capital Account Restrictions: Summary of remarks on the Relationship to 
the Mandate of the IMF,'' 10 ISLA Journal of International Comparative 
Law, 2004. http://www.aprnet.org/index.php?a=show&c=Volume%2015
%20June%202007&t=journals&i=46.
---------------------------------------------------------------------------
    Broader exception for financial stability measures: Allowing 
exceptions during times of crisis would be a positive, but insufficient 
step forward. Many economists argue that capital control measures are 
most useful if they are enacted ``when the sun is shining.'' Once the 
dark clouds of crisis become evident, it can be too late for such 
controls to be effective.
    Chile's encaje (``strongbox'' in Spanish) is often cited as an 
example of effective use of capital controls through an ongoing policy. 
Throughout most of the 1990s, the Chilean government subjected capital 
inflows to a one-year, non-interest paying deposit with the central 
bank. The deposit requirement varied from 10 to 30 percent, and the 
penalty for early withdrawal ranged from 1 to 3 percent. Chile faired 
better than most other Latin American countries during the Mexican peso 
crisis in 1994 and the Asian crisis a few years later. An IMF research 
review concluded that the encaje, combined with other financial sector 
reforms, allowed the government more monetary policy autonomy and 
shifted the composition of foreign investment from ``hot money'' 
towards the longer term.\19\ After entering into discussions of a 
possible trade agreement with the United States, the Chilean government 
eliminated the encaje in 1998. In recent years, however, numerous 
countries have used Chilean-style controls on inflows.\20\
---------------------------------------------------------------------------
    \19\ Akira Ariyoshi, Karl Habermeier, Bernard Laurens, Inci Otker-
Robe, Jorge Ivan Canales-Kriljenko, and Andrei Kirilenko, ``Capital 
Controls: Country Experiences with Their Use and Liberalization,'' 
International Monetary Fund, May 17, 2000. http://www.imf.org/external/
pubs/ft/op/op190/index.htm.
    \20\ Eduardo Levy Yeyati, Sergio L. Schmukler, Neeltje Van Horen, 
``Crises, Capital Controls, and Financial Integration,'' Policy 
Research Working Paper 4770, World Bank, November 2008. http://www-
wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2008/11/06/
000158349_20081106083956/Rendered/PDF/WPS4770.pdf.
---------------------------------------------------------------------------
    One example of a broader exception for capital controls to support 
financial stability can be found in the Norwegian government's 2007 
model bilateral investment treaty. This agreement allows for 
restrictions on capital flows when necessary to ensure compliance with 
laws and regulations concerning financial security or the prevention 
and remedying of environmental damage.\21\ The treaty requires 
equitable, non-discriminatory and good faith application of the laws. 
Similar language could be added to the current list of exceptions to 
the capital control restrictions in U.S. trade and investment 
agreements.
---------------------------------------------------------------------------
    \21\ Norway model bilateral investment treaty, 2007. http://
ita.law.uvic.ca/documents/NorwayModel2007.doc.
---------------------------------------------------------------------------
Conclusion
    I would like to thank the Subcommittee for taking on the task of 
reviewing the investment rules in U.S. trade and investment agreements 
to ensure that they advance the public interest. This is particularly 
timely in light of the current financial crisis. The U.S. Congress has 
a tremendous opportunity to apply lessons from past crises and work 
with counterparts in other nations to build a more equitable, 
sustainable, and stable global economy.

                                 

                        Statement of Todd Tucker

    I thank Subcommittee Chairman Levin and the other Members of the 
Ways & Means Committee for this opportunity to submit written testimony 
on behalf of Public Citizen for the record for the Hearing on 
Investment Protections in U.S. Trade and Investment Agreements. My 
testimony can be summarized with the following three points, elaborated 
in detail below:

          1. The record of the North American Free Trade Agreement 
        (NAFTA) demonstrates why removing harmful investment provisions 
        from international agreements is in the interest of the United 
        States and its trading partners. NAFTA's investment chapter 
        provides incentives to offshore jobs by removing many of the 
        costs and risks of relocating production offshore. It also 
        subjects U.S. environmental, consumer and other public-interest 
        laws to challenge by foreign investors empowered to demand U.S. 
        government compensation directly in foreign tribunals for 
        domestic laws they deem to undermine their expected future 
        profits. The investment chapter of the Central America Free 
        Trade Agreement (CAFTA) expanded on the definition of foreign 
        investments that were provided special protections and rights. 
        Instructions in the 2002 Fast Track--that U.S. trade agreements 
        not provide greater rights to foreign investors than are 
        provided to U.S. investors under the U.S. Constitution--have 
        been systematically ignored by U.S. negotiators. As a result, 
        CAFTA, various FTAs approved after CAFTA, and the three 
        leftover Bush ``Free Trade Agreements'' (FTAs) all contain 
        provisions that provide greater substantive and procedural 
        rights to foreign investors. Not one word of the investment 
        chapters of the FTAs was altered to remedy these problems in 
        the May 2007 revisions to the Bush FTAs. The non-binding 
        preambular language added to these agreements has no legal 
        effect and fails to address the investment chapters' problems.
          2. We support President Barack Obama's campaign pledges to 
        overhaul the investment provisions of U.S. trade agreements.
          3. In order for President Obama to fulfill these commitments, 
        a set of specific changes must be made to current and 
        prospective trade and investment agreements.

                               __________

1.  The record of NAFTA demonstrates why removing harmful investment 
        provisions from international agreements is in the interest of 
        the United States and its trading partners.
    NAFTA's investor protections were among the most controversial 
aspects of the pact, and an expanded version of these were also 
included in later trade agreements. These pacts grant foreign investors 
a private right of action to enforce their trade-agreement foreign-
investor rights. Through these, they can challenge government policies 
in international tribunals at the World Bank and United Nations and 
demand host-government compensation for policies that they consider to 
have impaired their new trade-agreement rights. This includes 
compensation for lost profits when government regulatory policy 
undermines their ``expectation of gain or profit.'' \1\ The special 
foreign-investor privileges eliminate the uncertainty and costs of 
having to use ``host'' country courts to settle many common disputes. 
Thus, effectively, these investment rules facilitate the relocation of 
investment offshore to low-wage venues by eliminating many of the costs 
and risks of such relocation for U.S. investors and firms.
---------------------------------------------------------------------------
    \1\ For instance, NAFTA Article 1105.
      For instance, U.S.-Peru FTA Article 10.28.
---------------------------------------------------------------------------
    Specifically, the investment chapters in NAFTA, CAFTA and various 
NAFTA-style FTAs set a ``minimum standard of treatment'' that 
signatories must provide foreign investors,\2\ prohibit foreign 
investors from being treated less favorably than domestic investors,\3\ 
ban common performance requirements on foreign investors (such as 
domestic-content laws),\4\ and forbid limits on capital movements, such 
as currency controls.\5\ Additionally, these pacts provide foreign 
investors operating in the United States with greater compensation 
rights for extended categories of ``expropriation'' or ``takings'' than 
U.S. companies have under domestic law, including for ``indirect 
takings'' or measures ``tantamount to'' a takings.\6\ These trade-pact 
investor rules contain no sovereign-immunity shield for governments, a 
radical departure from longstanding U.S. protections.
---------------------------------------------------------------------------
    \2\ See e.g. NAFTA Article 11.5 or CAFTA Article 10.5.
    \3\ See e.g. NAFTA Article 11. 2 or CAFTA Article 10.3
    \4\ See e.g. NAFTA Article 11.9 or CAFTA Article 10.6.
    \5\ See e.g. NAFTA Article 11.9 or CAFTA Article 10.8.
    \6\ See e.g. NAFTA Article 11.10 and 11.39 or CAFTA Article 10.7 
and 10.28.
---------------------------------------------------------------------------
    During the debate surrounding the 2002 grant of Fast Track 
authority, dozens of groups and organizations representing state and 
local legislative and judicial officials weighed in, demanding that 
Fast Track contain provisions to ensure that foreign investors would 
not be granted ``greater rights'' in trade-agreement investment 
chapters than U.S. firms have under the U.S. Constitution. These groups 
include the Conference of Chief Justices, National Association of 
Attorneys General, U.S. Conference of Mayors, National Association of 
Counties, National Association of Towns and Townships, National League 
of Cities, and National Conference of State Legislatures.\7\ The next 
trade agreements negotiated did contain some improvements with regard 
to the transparency of trade-tribunal operations but unfortunately 
failed to meet the demands by state and local officials and others--
again providing foreign investors greater rights than the U.S. 
Constitution provides to U.S. businesses and citizens.
---------------------------------------------------------------------------
    \7\ Letters from these groups and others can be accessed at: http:/
/www.citizen.org/trade/subfederal/inv.
---------------------------------------------------------------------------
    During the time-period which Fast Track was operational from 2002-
2007, the Bush administration sought to expand NAFTA-style investor 
rights to new countries via bilateral and regional trade agreements, 
including the U.S.-Chile FTA, U.S.-Singapore FTA, U.S.-Morocco, CAFTA, 
U.S.-Oman FTA, U.S.-Peru FTA, and proposed agreements with Panama, 
Colombia, and Korea. USTR also has pushed to put these extraordinary 
foreign-investor privileges into the WTO, but the majority of WTO 
member countries have flatly refused. The raft of new agreements with 
the foreign-investor privileges are sure to spawn new cases and new 
liability for U.S. taxpayers, who must foot the bill if foreign 
investors succeed in challenging state or federal laws--as well as face 
the consequences of not having vital environmental health, safety and 
zoning policies enforced.
    Public Citizen has uncovered 59 of these claims filed thus far by 
corporate interests and investors under NAFTA's Chapter 11. While only 
a small number of these cases have been finalized, the track record of 
cases and claims demonstrate an array of attacks on public policies and 
normal regulatory activity at all levels of government. The cases have 
a common theme: they seek compensation for government actions that 
would not be subject to such demands under U.S. law, and claim 
violations of property rights established in NAFTA that extend well 
beyond the robust property rights the U.S. Supreme Court has 
interpreted are provided by the U.S. Constitution.
    Under NAFTA, around $69 million has been paid out by governments in 
corporate challenges against toxic-substance bans, logging rules, 
operating permits for a toxic-waste site, and more.\8\ Although not 
explored in detail in this testimony, similar troubling provisions 
exist in U.S. bilateral investment treaties. Appendix I contains 
information on both concluded and pending NAFTA investor-state cases 
through the beginning of 2009, while pages 4-7 of this testimony 
include a lengthier critique of specific aspects of the NAFTA-style 
investor rights that have been included as Chapter 10 in more recent 
FTAs, such as the Bush administration's U.S.-Panama FTA.
---------------------------------------------------------------------------
    \8\ Mary Bottari and Lori Wallach, ``NAFTA Threat to Sovereignty 
and Democracy: The Record of NAFTA Chapter 11 Investor-State Cases 
1994-2005,'' Public Citizen's Global Trade Watch, February 2005.
---------------------------------------------------------------------------
2.  We support President Barack Obama's campaign pledges to overhaul 
        the investment provisions of U.S. trade agreements.
    President Obama campaigned on a whole series of specific trade-
reform commitments. Whether he will meet his pledges to the American 
people will be tested by whether the Obama administration continues 
with more Bush NAFTA-style FTAs, such as the Panama FTA, or conducts 
the promised repair of the existing trade agreements and develops a new 
policy that, as President Obama said, benefits the many, not only a few 
special interests. Specifically, President Obama pledged to remedy the 
following investment provisions that the Panama FTA would replicate:

          Obama answered ``yes'' to the question: ``Will you 
        commit to renegotiate NAFTA to eliminate its investor rules 
        that allow private enforcement by foreign investors of these 
        investor privileges in foreign tribunals and that give foreign 
        investors greater rights than are provided by the U.S. 
        Constitution as interpreted by our Supreme Court thus promoting 
        offshoring?'' \9\
---------------------------------------------------------------------------
    \9\ http://www.citizenstrade.org/pdf/
QuestionnairePennsylvaniaFairTradeCoalition040108FINAL
_SenatorObamaResponse.pdf.
---------------------------------------------------------------------------
          He also said: ``While NAFTA gave broad rights to 
        investors, it paid only lip service to the rights of labor and 
        the importance of environmental protection. We should amend 
        NAFTA to make clear that fair laws and regulations written to 
        protect citizens in any of the three countries cannot be 
        overridden simply at the request of foreign investors.'' \10\
---------------------------------------------------------------------------
    \10\ http://www.citizen.org/documents/
TXFairTradeCoalitionObama.pdf.

    Similar language was included in the Democratic Party platform, 
which stated: ``We will not negotiate free trade agreements that stop 
the government from protecting the environment, food safety or the 
health of its citizens, give greater rights to foreign investors than 
to U.S. investors, require the privatization of our vital public 
services, or prevent developing country governments from adopting 
humanitarian licensing policies to improve access to life-saving 
medications. We will stand firm against agreements that fail to live up 
to these important benchmarks.'' \11\
---------------------------------------------------------------------------
    \11\ Democratic National Convention Committee, ``The 2008 
Democratic Party Platform: Renewing America's Progress,'' August 25, 
2008. Available at http://www.democrats.org/a/party/platform.html.
---------------------------------------------------------------------------
    Campaigning on these themes stretched beyond the presidential 
races, to congressional races in both chambers of Congress, from 
Florida to New Mexico, from Colorado to New York. Indeed, successful 
candidates in the 2006 and 2008 races ran on a resounding platform of 
fundamental overhaul of U.S. trade and economic policies. In the two 
cycles, there was a combined shift of 72 members in the fair-trade 
composition of Congress.\12\
---------------------------------------------------------------------------
    \12\ Todd Tucker, ``Fair Trade Gets an Upgrade,'' Public Citizen's 
Global Trade Watch, November 2008.
---------------------------------------------------------------------------
    Concerns with trade-pact investment provisions have long stretched 
across party lines and throughout the Democratic Caucus, as shown by 
these quotes from the debate around the Central America Free Trade 
Agreement (CAFTA). Conservatives, such as former Rep. Butch Otter, now 
the Republican governor of Idaho, expressed concern with FTA investment 
provisions, saying: ``I'd like to draw your attention to the fact that 
CAFTA contains 1,000 pages of international law establishing, among 
other things, property rights for foreign investors that may impose 
restrictions on U.S. land-use policy. Chapter 10 of CAFTA outlines a 
system under which foreign investors operating in the United States are 
granted greater property rights than U.S. law provides for our own 
citizens! Mr. Speaker, that's not encouraging free trade. That's giving 
away our natural resources and our national sovereignty.'' \13\
---------------------------------------------------------------------------
    \13\ Rep. Clement LeRoy ``Butch'' Otter (R-Idaho), Floor Statement 
on CAFTA, July 29, 2005.
---------------------------------------------------------------------------
    Meanwhile, New Democrat Coalition member Rep. Jane Harman (D-
Calif.) and other representatives said:

       ``We wanted to draw your attention to--the threat that the 
investor rights rules in the Central America-Dominican Republic Free 
Trade Agreement (CAFTA) pose to important state and local laws and 
regulations that protect the environment and public health. Like 
Chapter 11 of NAFTA, the investor rights provisions of CAFTA give 
foreign corporations the power to demand payment from the U.S. when 
public interest protections affect a company's commercial interests . . 
. The State of California has now joined state and local government 
groups in saying that U.S. trade negotiators failed to heed the lessons 
of NAFTA in their negotiation of the investor rights rules in CAFTA. We 
hope you will join us in opposing CAFTA.'' \14\
---------------------------------------------------------------------------
    \14\ On file with Public Citizen.

    The concern about these expansive foreign investor rights and their 
private enforcement across party and caucus lines is logical, since 
NAFTA-CAFTA-style foreign investor provisions can undermine areas of 
concern across the entire political spectrum in Congress and the 
country.
3.  In order for President Obama to fulfill these commitments, a set of 
        specific changes must be made to current and prospective trade 
        and investment agreements.
    The Investment chapters of the Panama, Colombia, and Korea FTAs 
need the fundamental changes listed below in order to deliver on 
President Obama's campaign commitments. These changes are also 
necessary to meet the concerns raised by the AFL-CIO, Change to Win, 
Public Citizen, and other groups in 2007, when Democratic congressional 
trade committee leaders and the White House discussed renegotiating 
aspects of the four Bush-negotiated agreements. (Indeed, this section 
of the testimony closely tracks the documents describing necessary 
fixes to the FTA investment chapters submitted by many environmental, 
consumer, and labor organizations at that time.) These changes are also 
necessary for ensuring pacts meet the 2002 Trade Promotion Authority 
standard of not providing foreign investors with greater rights than 
those provided to domestic firms/investors by the U.S. Constitution. 
(The Articles below refer to the Panama FTA, but similar if not 
identical articles can be found in each agreement, meaning similar if 
not identical changes are needed in the Colombia and Korea FTAs as 
well.)
    1. To conform with U.S. taking laws, the Panama FTA's definition of 
investment at Article 10.29 must be bifurcated so that the current 
expansive definition does not apply to claims for compensation for 
expropriation under Article 10.7(1). The current definition covers all 
provisions of the investment agreements and extends beyond the 
commitment of capital or the acquisition of real property or other 
tangible assets. To comply with U.S. takings law, the highly subjective 
standards used to define an investment subject to compensation--
including expectation of gain or profit, or the assumption of risk--
must be removed, as such actions are not considered forms of property 
under U.S. law regarding expropriation claims. To bring the FTA 
standard into compliance with U.S. property rights takings law, Article 
10.29 must be amended to strike the categories of property that extend 
beyond commitment of capital or the acquisition of real property or 
other tangible assets.\15\ The expectation of gain or profit, or the 
assumption of risk should not qualify as investment as it does in the 
Panama FTA and the other past and current Bush FTAs. Finally, the 
renegotiated definition must establish that a mere pledge of capital 
does not establish an investment, but rather ``investment'' must be 
defined to include the actual physical presence of capital.
---------------------------------------------------------------------------
    \15\ The Article 10.29 text would have to be modified to exclude 
the stricken clauses below: ``investment means every asset that an 
investor owns or controls, directly or indirectly, that has the 
characteristics of an investment, including such characteristics as the 
commitment of capital or other resources, the expectation of gain or 
profit, or the assumption of risk. Forms that an investment may take 
include: (a) an enterprise; (b) shares, stock, and other forms of 
equity participation in an enterprise; (c) bonds, debentures, other 
debt instruments, and loans;7 8 (d) futures, options, and other 
derivatives; (e) turnkey, construction, management, production, 
concession, revenue-sharing, and other similar contracts; (f) 
intellectual property rights; (g) licenses, authorizations, permits, 
and similar rights conferred pursuant to domestic law;9 10 and other 
tangible or intangible, movable or immovable property, and related 
property rights, such as leases, mortgages, liens, and pledges.''
---------------------------------------------------------------------------
    2. The Panama FTA must be amended to explicitly state that the 
minimum standard of treatment grants no new substantive rights and no 
greater due process rights than what U.S. citizens currently possess 
under the due process clause of the U.S. Constitution. Currently, the 
``fair and equitable'' language, if viewed as an independent standard, 
would invite an investment tribunal to apply its own view of what is 
``fair'' or ``equitable,'' unbounded by any limits in U.S. law. 
Moreover, those terms are inherently subjective. The Annex that was 
added to CAFTA and included in recent FTAs--which seeks to define ``the 
minimum standard of treatment'' that is guaranteed to foreign 
investors--fails to accomplish Congress' goal of foreclosing arbitral 
panels' discretion to read new substantive rights into this standard 
unbounded by U.S. law limits. This can be remedied by replacing the 
Panama FTA's circular Annex 10-A language \16\ with the following: 
``The Parties confirm their shared understanding that the minimum 
standard of treatment, defined at Article 10.5 as `fair and equitable 
treatment,' grants no new substantive rights and no greater due process 
rights than what U.S. citizens currently possess under the due process 
clause of the United States Constitution.'' 
---------------------------------------------------------------------------
    \16\ Annex 10-A: ``Customary International Law: The Parties confirm 
their shared understanding that `customary international law' generally 
and as specifically referenced in Articles 10.5, 10.6, and Annex 10-B 
results from a general and consistent practice of States that they 
follow from a sense of legal obligation. With regard to Article 10.5, 
the customary international law minimum standard of treatment of aliens 
refers to all customary international law principles that protect the 
economic rights and interests of aliens.''
---------------------------------------------------------------------------
    3. U.S. takings jurisprudence permits compensation for direct 
takings of real property, but only allows compensation in the rarest of 
situations when government action does not involve an actual 
expropriation, but some lesser interference with property rights. 
Democrats successfully defeated a 1990s push to establish ``regulatory 
takings'' compensation in U.S. law so as to preclude demands for 
compensation arising from the costs of complying with environmental, 
land-use and other regulations. To conform with the no-greater-rights 
standard, the FTAs must permit compensation only for direct takings and 
indirect takings that meet the extremely narrow U.S. law standard of a 
complete and permanent destruction of all value of the entirety of a 
property. (The holding in Penn Central Transportation Co. v. New York 
City, 438 U.S. 104 (1978).) This problem can be remedied by adding the 
following clause to the Panama FTA's Annex 10-B(4): ``government 
actions that merely diminish the property's value but do not destroy 
all value of the entire property permanently is not an indirect 
taking.''
    4. To be consistent with U.S. law (i.e. not provide greater rights) 
investor-state compensation should be available only for instances of 
direct expropriation of a foreign investors' tangible property. 
Further, there should be no, not ``rare,'' circumstances when non-
discriminatory regulatory actions by a Party that are designed and 
applied to protect legitimate public welfare objectives, such as public 
health, safety, and the environment, constitute an indirect 
expropriation. An Annex added to recent FTAs in response to Congress' 
concerns that trade-agreement investment rules provide compensation for 
regulatory takings actually creates a new conflict with U.S. property 
rights law. Under U.S. law, there are no circumstances when non-
discriminatory regulatory actions by a Party that are designed and 
applied to protect legitimate public welfare objectives that do not 
extinguish all value of a property would be subject to compensation. 
The Panama FTA's Annex 10-B(4)(b) states that only in ``rare 
circumstances'' can such policies be the basis for compensation. This 
can be remedied by striking the words ``either'' and ``or indirectly'' 
in Article 10.7(1), striking ``or intangible'' from Annex 10-B(2) and 
striking ``Except in rare circumstances'' from Annex 10-B(4)(b), and 
(as noted) adding the following clause to Annex 10-B(4): ``government 
actions that merely diminish the property's value but do not destroy 
all value of the entire property permanently is not an indirect 
taking.''
    5. One of the most controversial provisions of investment chapters 
is the investor-state dispute resolution mechanism. As we have seen 
under NAFTA, the investor-state mechanism has been used to challenge 
legitimate public-interest measures. It should be sufficient that an 
investor make use the domestic legal systems to bring a claim or, if 
not satisfied, push his/her respective government for state-state 
dispute settlement. The state-state approach has precedent in the U.S.-
Australia FTA. The above amendments limit to U.S. law the standards 
that would be applied by investor-state tribunals. However, the above 
fixes do not remedy the core violation of the no-greater-rights 
standard--which is the very opportunity for a foreign investor 
operating within the United States to seek remedy before an investor-
state tribunal, while U.S. investors and firms are limited to seeking 
remedy in U.S. courts. To remedy the violation of the no-greater-rights 
standard, the Panama FTA's Section B (Articles 10.15-10.27) of the 
Investment Chapter must be stricken. Government-government enforcement 
action, based on the renegotiated terms described above, would provide 
recourse for actual acts of direct expropriation, while safeguarding 
legitimate public-interest laws from challenge and ensuring foreign 
investors are not provided greater rights than domestic investors 
operating domestically.
    6. We are deeply concerned that the provisions on transfers, 
Article 10.8, would limit governments' ability to use legitimate 
measures designed to restrict the flow of capital in order to protect 
themselves from financial instability. Without adequate measures to 
prevent and respond to such financial instability, particularly in 
developing countries, broad sustainable development will remain out of 
reach for many developing countries. The increased frequency and 
severity of financial crises also hurts U.S. economic interests, as 
crisis-stricken countries devalue their currencies and flood the U.S. 
market with under-priced exports in order to recover. Thus, Article 
10.8 should be amended to provide for reasonable capital controls.
    In conclusion, recent attempts to change aspects of the NAFTA 
investor template--including language inserted into the 2002 Fast Track 
(which resulted in the yet-more-expansive CAFTA investor terms), or the 
May 10, 2007 agreement between the Bush administration and certain 
Members of Congress (which did not change a word of the FTAs' 
investment chapters),--did not address these issues. In particular, the 
May 10 deal's insertion of non-binding preambular language to the FTAs 
is galling. As a matter of law, the actual binding provisions of the 
FTAs' investment chapters described above trump the non-binding 
preambular language which bizarrely states that ``foreign investors are 
not hereby accorded greater substantive rights with respect to 
investment protections than domestic investors under domestic law 
where, as in the United States, protections of investor rights under 
domestic law equal or exceed those set forth in this Agreement''--even 
though in fact that is precisely what the agreement's binding legal 
text does. No arbitral tribunal is bound to the FTA's hortatory 
preambular language. Rather, future cases would be decided on the 
actual agreement text, which as noted above is severely flawed. That no 
changes were made to the investment chapter is a point about which the 
Bush administration bragged in its fact sheets on the May 2007 
deal.\17\ Only by changing the binding language through renegotiation 
can the problems discussed above be remedied.
---------------------------------------------------------------------------
    \17\ USTR suggested that ``the four pending FTAs (as well as the 
other FTAs we have concluded in the past five years) fully achieve'' 
the congressional requirement that no foreign investors not be accorded 
greater rights than U.S. investors operating in the United States. See 
http://ustr.gov/assets/Document_Library/Fact_Sheets/2007/
asset_upload_file146_11282.pdf.
---------------------------------------------------------------------------
APPENDIX I: MORE DETAIL ON NAFTA INVESTOR-STATE CASES \18\
---------------------------------------------------------------------------
    \18\ Key: * Indicates date Notice of Intent to File a Claim was 
filed, the first step in the NAFTA investor-state process, when an 
investor notifies a government that it intends to bring a NAFTA Chapter 
11 suit against that government.
      ** Indicates date Notice of Arbitration was filed, the second 
step in the NAFTA investor-state process, when an investor notifies an 
arbitration body that it is ready to commence arbitration under NAFTA 
Chapter 11.


   CASES IN WHICH INVESTORS OBTAINED PAYMENT FOR CHALLENGES OF PUBLIC-
                         INTEREST AND OTHER LAWS
------------------------------------------------------------------------
 Corporation or
   Investor v.       Venue       Damages     Status of        Issue
     Country                     Sought         Case
------------------------------------------------------------------------
Ethyl v. Canada   UNCITRAL    $201 million  Settled;     U.S. chemical
                                             Ethyl win,   company
April 14, 1997*                              $13          challenged
                                             million      Canadian
                                                          environmental
                                                          ban of
                                                          gasoline
                                                          additive MMT.
                                                         ...............
                                                         July 1998:
                                                          Canada loses
                                                          NAFTA
                                                          jurisdictional
                                                          ruling,
                                                          reverses ban,
                                                          pays $13
                                                          million in
                                                          damages and
                                                          legal fees to
                                                          Ethyl.
------------------------------------------------------------------------
S.D. Myers v.     UNCITRAL    $20 million   S.D. Myers   U.S. waste
 Canada                                      win, $5      treatment
                                             million      company
July 22, 1998*                                            challenged
                                                          temporary
Oct. 30, 1998**                                           Canadian ban
                                                          of PCB exports
                                                          that complied
                                                          with
                                                          multilateral
                                                          environmental
                                                          treaty on
                                                          toxic-waste
                                                          trade.
                                                         ...............
                  ..........  ............  ...........  November 2000:
                                                          Tribunal
                                                          dismissed S.D.
                                                          Myers claim of
                                                          expropriation,
                                                          but upheld
                                                          claims of
                                                          discrimination
                                                          and determined
                                                          that the
                                                          discrimination
                                                          violation also
                                                          qualified as a
                                                          violation of
                                                          the ``minimum
                                                          standard of
                                                          treatment''
                                                          foreign
                                                          investors must
                                                          be provided
                                                          under NAFTA.
                                                          Panel also
                                                          stated that a
                                                          foreign firm's
                                                          ``market
                                                          share'' in
                                                          another
                                                          country could
                                                          be considered
                                                          a NAFTA-
                                                          protected
                                                          investment.
                                                         ...............
                  ..........  ............  ...........  February 2001:
                                                          Canada
                                                          petitioned to
                                                          have the NAFTA
                                                          tribunal
                                                          decision
                                                          overturned in
                                                          a Canadian
                                                          Federal Court.
                                                         ...............
                  ..........  ............  ...........  January 2004:
                                                          The Canadian
                                                          federal court
                                                          dismissed the
                                                          case, finding
                                                          that any
                                                          jurisdictional
                                                          claims were
                                                          barred from
                                                          being raised
                                                          since they had
                                                          not been
                                                          raised in the
                                                          NAFTA claim.
                                                          The federal
                                                          court judge
                                                          also ruled
                                                          that upholding
                                                          the tribunal
                                                          award would
                                                          not violate
                                                          Canadian
                                                          ``public
                                                          policy'' as
                                                          Canada had
                                                          argued.
------------------------------------------------------------------------
Pope & Talbot     UNCITRAL    $381 million  P&T win,     U.S. timber
                                             $621,000     company
Dec. 24, 1999*                                            challenged
                                                          Canadian
March 25, 1999**                                          implementation
                                                          of 1996 U.S.-
                                                          Canada
                                                          Softwood
                                                          Lumber
                                                          Agreement.
                                                         ...............
                  ..........  ............  ...........  April 2001:
                                                          Tribunal
                                                          dismissed
                                                          claims of
                                                          expropriation
                                                          and
                                                          discrimination
                                                          , but held
                                                          that the rude
                                                          behavior of
                                                          the Canadian
                                                          government
                                                          officials
                                                          seeking to
                                                          verify firm's
                                                          compliance
                                                          with lumber
                                                          agreement
                                                          constituted a
                                                          violation of
                                                          the ``minimum
                                                          standard of
                                                          treatment''
                                                          required by
                                                          NAFTA for
                                                          foreign
                                                          investors.
                                                          Panel also
                                                          stated that a
                                                          foreign firm's
                                                          ``market
                                                          access'' in
                                                          another
                                                          country could
                                                          be considered
                                                          a NAFTA-
                                                          protected
                                                          investment.
------------------------------------------------------------------------
Metalclad v.      ICSID       $90 million   Metalclad    U.S. firm
 Mexico                                      win, $15.6   challenged
                                             million      Mexican
Dec. 30, 1996*                                            municipality's
                                                          refusal to
Jan. 2, 1997**                                            grant
                                                          construction
                                                          permit for
                                                          toxic waste
                                                          facility
                                                          unless the
                                                          firm cleaned
                                                          up existing
                                                          toxic waste
                                                          problems that
                                                          had resulted
                                                          in the
                                                          facility being
                                                          closed when it
                                                          was owned by a
                                                          Mexican firm
                                                          from which
                                                          Metalclad
                                                          acquired the
                                                          facility.
                                                          Metalclad also
                                                          challenged
                                                          establishment
                                                          of an
                                                          ecological
                                                          preserve on
                                                          the site by a
                                                          Mexican state
                                                          government.
                                                         ...............
                  ..........  ............  ...........  August 2000:
                                                          Tribunal ruled
                                                          that the
                                                          denial of the
                                                          construction
                                                          permit and the
                                                          creation of an
                                                          ecological
                                                          reserve are
                                                          tantamount to
                                                          an
                                                          ``indirect''
                                                          expropriation
                                                          and that
                                                          Mexico
                                                          violated
                                                          NAFTA's
                                                          ``minimum
                                                          standard of
                                                          treatment''
                                                          guaranteed
                                                          foreign
                                                          investors,
                                                          because the
                                                          firm was not
                                                          granted a
                                                          ``clear and
                                                          predictable''
                                                          regulatory
                                                          environment.
                                                         ...............
                  ..........  ............  ...........  October 2000:
                                                          Mexican
                                                          government
                                                          challenged the
                                                          NAFTA ruling
                                                          in Canadian
                                                          court alleging
                                                          arbitral
                                                          error. A
                                                          Canadian judge
                                                          ruled that the
                                                          tribunal erred
                                                          in part by
                                                          importing
                                                          transparency
                                                          requirements
                                                          from NAFTA
                                                          Chapter 18
                                                          into NAFTA
                                                          Chapter 11 and
                                                          reduced the
                                                          award by $1
                                                          million. In
                                                          2004, the
                                                          Mexican
                                                          federal
                                                          government's
                                                          effort to hold
                                                          the involved
                                                          state
                                                          government
                                                          financially
                                                          responsible
                                                          for the award
                                                          failed in the
                                                          Mexican
                                                          Supreme Court.
------------------------------------------------------------------------
Karpa v. Mexico   ICSID       $50 million   Karpa win,   U.S. cigarette
                                             $1.5         exporter
Feb. 16, 1998*                               million      challenged
                                                          denial of
Apr. 7, 1999**                                            export tax
                                                          rebate by
                                                          Mexican
                                                          government.
                                                         ...............
                  ..........  ............  ...........  December 2002:
                                                          Tribunal
                                                          rejected an
                                                          expropriation
                                                          claim, but
                                                          upheld a claim
                                                          of
                                                          discrimination
                                                          after the
                                                          Mexican
                                                          government
                                                          failed to
                                                          provide
                                                          evidence that
                                                          the firm was
                                                          being treated
                                                          similarly to
                                                          Mexican firms
                                                          in ``like
                                                          circumstances.
                                                          ''
                                                         ...............
                  ..........  ............  ...........  December 2003:
                                                          Canadian judge
                                                          dismissed
                                                          Mexico's
                                                          effort to set
                                                          aside award.
------------------------------------------------------------------------
ADM/Tate & Lyle   ICSID       $100 million  ADM win,     U.S. company
 v. Mexico                                   $33.5        producing high
                                             million      fructose corn
Oct. 14, 2003*                                            syrup sought
                                                          compensation
Aug. 4, 2004**                                            against
                                                          Mexican
                                                          government for
                                                          imposition of
                                                          a tax on
                                                          beverages made
                                                          with HFCS, but
                                                          not Mexican
                                                          cane sugar.
                                                          Mexico argued
                                                          that the tax
                                                          was legitimate
                                                          because the
                                                          U.S. had
                                                          failed to open
                                                          its market
                                                          sufficiently
                                                          to Mexican
                                                          cane sugar
                                                          exports under
                                                          NAFTA.
                                                         ...............
                  ..........  ............  ...........  November 2007:
                                                          NAFTA tribunal
                                                          ruled that the
                                                          HFSC tax was
                                                          discriminatory
                                                          and a NAFTA-
                                                          illegal
                                                          performance
                                                          requirement,
                                                          but did not
                                                          find it was an
                                                          expropriation.
                                                          This issue was
                                                          also litigated
                                                          in the WTO,
                                                          which issued a
                                                          ruling against
                                                          Mexico and in
                                                          favor of the
                                                          U.S. in 2006.
------------------------------------------------------------------------
Corn Products     ICSID       $325 million  Corn         U.S. company
                                             Products     producing high
International v.                             win,         fructose corn
Mexico                                       amount       syrup (HFCS),
                                             pending      a soft drink
Jan. 28, 2003*                                            sweetener,
                                                          sought
Oct. 21, 2003**                                           compensation
                                                          from Mexican
                                                          government for
                                                          imposition of
                                                          a tax on
                                                          beverages
                                                          sweetened with
                                                          HFCS, but not
                                                          Mexican cane
                                                          sugar.
                                                         ...............
                  ..........  ............  ...........  April 2009:
                                                          January 2008
                                                          award finally
                                                          become public.
                                                          Tribunal ruled
                                                          for CPI on the
                                                          merits then
                                                          began a
                                                          monetary
                                                          damages
                                                          assessment.
                                                          Panel
                                                          dismissed most
                                                          claims but
                                                          found that
                                                          Mexico
                                                          violated the
                                                          national
                                                          treatment rule
                                                          by ``fail[ing]
                                                          to accord CPI,
                                                          and its
                                                          investment,
                                                          treatment no
                                                          less
                                                          favourable
                                                          than that it
                                                          accorded to
                                                          its own
                                                          investors in
                                                          like
                                                          circumstances,
                                                          namely the
                                                          Mexican sugar
                                                          producers who
                                                          were competing
                                                          for the market
                                                          in sweeteners
                                                          for soft
                                                          drinks.''
------------------------------------------------------------------------


CASES IN WHICH THE U.S. ``DODGED THE BULLET'' ON PROCEDURAL GROUNDS
    There have been four cases against the United States that have made 
it to arbitration; these were dismissed on largely procedural grounds.
    1. Loewen case: In 1998, a Canadian funeral conglomerate, Loewen, 
used NAFTA's investor-state system to challenge Mississippi's rules of 
civil procedure and the amount of a jury award related to a case in 
which a Mississippi firm had sued Loewen in a private contract dispute 
in state court. A World Bank tribunal issued a chilling ruling in this 
NAFTA case, finding for Loewen on the merits.\19\ The ruling made clear 
that few domestic court decisions are immune to a rehearing in a NAFTA 
investor-state tribunal. However, the tribunal dismissed the case 
before the penalty phase thanks to a remarkable fluke: lawyers involved 
with the firm's bankruptcy proceedings reincorporated Loewen as a U.S. 
firm, thus destroying its ability to obtain compensation as a 
``foreign'' investor.
---------------------------------------------------------------------------
    \19\ ICSID, Decision on hearing of Respondent's objection to 
competence and jurisdiction, The Loewen Group, Inc. and Raymond L. 
Loewen v. United States of America, Jan. 5, 2001, Case No. ARB(AF)/98/
3.
---------------------------------------------------------------------------
    2. Mondev case: In 1999, a Canadian real estate developer 
challenged Massachusetts Supreme Court ruling regarding local 
government sovereign immunity and land-use policy. In October 2002, the 
claim was dismissed on procedural grounds. The tribunal found that the 
majority of Mondev's claims, including its expropriation claim, were 
time-barred because the dispute on which the claim was based predated 
NAFTA.
    3. Methanex: In 1999, a Canadian corporation that produced 
methanol, a component chemical of the gasoline additive MTBE, 
challenged California phase-out of the additive, which was 
contaminating drinking water sources around the state. In August 2005, 
the claim was dismissed on procedural grounds. The tribunal ruled that 
it had no jurisdiction to determine Methanex's claims because 
California's MTBE ban did not have a sufficient connection to the 
firm's methanol production to qualify Methanex for protection under 
NAFTA's investment chapter. Tribunal orders Methanex to pay U.S. $3 
million in legal fees. The tribunal permitted NGOs to submit amici 
briefs and Methanex allowed hearings to be open to the public.
    4. ADF: In 2000, a Canadian steel contractor challenged U.S. Buy 
America law related to a Virginia highway construction contract. In 
January 2003, the claim dismissed on procedural grounds. The tribunal 
found that the basis of the claim constituted ``government 
procurement'' and therefore was not covered under NAFTA Article 1108. 
Starting with CAFTA, FTA investment chapters have included foreign-
investor protections for aspects of government procurement activities.
PENDING CASES AGAINST UNITED STATES CLOSEST TO COMPLETION
    The United States may well dodge the bullet on procedural grounds 
again. While there has been no final action on the Glamis case, for 
instance, this case involving a mining company may not result in an 
award against the United States: Glamis may not be considered a foreign 
investor, because the company had claimed it was ``a U.S. citizen'' in 
order to take advantage of an 1872 mining law, which allows only U.S. 
citizens or domestically-incorporated firms to exploit federal lands. 
Also, there was also no evidence of losses. Glamis was never forbidden 
to mine on its claim. Rather, it was required to meet the same 
backfilling rules that such mines must meet in California. Glamis could 
have complied with the law and worked its claim. Alternatively, given 
that Glamis Gold's mining claims are more valuable with gold at $800 an 
ounce (as it has been recently) than when the case started (gold was 
$325), Glamis could have sold its valuable mining rights, but instead 
launched an investor-state claim. More detail on this and other pending 
cases is provided below.
    1. Aspects of the state tobacco settlements, which have resulted in 
a dramatic drop in the rate of teenage smoking in the United States, 
are being challenged by Canadian tobacco traders.\20\ Grand River 
Enterprises, is the Canadian company seeking $340 million in damages 
over 1998 U.S. Tobacco Settlement, which requires tobacco companies to 
contribute to state escrow funds to help defray medical costs of 
smokers.
---------------------------------------------------------------------------
    \20\ UNCITRAL, ``Notice of Arbitration Under the Arbitration Rules 
of the United Nations Commission on International Trade Law and the 
North American Free Trade Agreement between Grand River Enterprises Six 
Nations, Ltd. et al. and Government of the United States of America,'' 
March 11, 2004a. Available at: http://www.state.gov/documents/
organization/30961.pdf.
---------------------------------------------------------------------------
    2. A Canadian mining firm is bringing a NAFTA suit over a 
California law that requires reclamation of open-pit, cyanide heap-
leach mining sites.\21\ Glamis Gold, the Canadian company is seeking 
$50 million in compensation for the California law requiring 
backfilling and restoration of open-pit mines near Native American 
sacred sites. The company's American subsidiary had acquired federal 
mining claims and was in the process of acquiring approval from state 
and Federal Governments to open an open-pit cyanide heap leach mine. 
When backfilling and restoration regulations were issued by California, 
Glamis filed a NAFTA claim rather than proceed with its application in 
compliance with the regulations.
---------------------------------------------------------------------------
    \21\ UNCITRAL, Notice of Arbitration Under the Arbitration Rules of 
the United Nations Commission on International Trade Law and the North 
American Free Trade Agreement, Glamis Gold Ltd. v. the Government of 
the United States, Dec. 9, 2003.
---------------------------------------------------------------------------
    3. A Canadian drug company is suing the United States under NAFTA 
because it was not clearly granted the right to manufacture a generic 
version of a Pfizer drug by the U.S. court system.\22\ Apotex is a 
Canadian generic drug manufacturer sought to develop a generic version 
of the Pfizer drug Zoloft (sertraline) when the Pfizer patent expired 
in 2006. Due to legal uncertainty surrounding the patent, the firm 
sought a declaratory judgment in U.S. District Court for the Southern 
District of New York to clarify the patent issues and give it the 
``patent certainty'' to be eligible for final FDA approval of its 
product upon the expiration of the Pfizer patent. The court declined to 
resolve Apotex's claim and dismissed the case in 2004, and this 
decision was upheld by the federal circuit court in 2005. In 2006, the 
case was denied a writ of certiorari by the U.S. Supreme Court. Because 
the courts declined to clarify the muddled patent situation, another 
generic competitor got a head-start in producing the drug. Apotex 
challenged all three court decisions as a misapplication of U.S. law, 
NAFTA expropriation, discrimination and a violation of its NAFTA rights 
to a ``minimum standard of treatment.'' They are demanding $8 million 
in compensation.
---------------------------------------------------------------------------
    \22\ UNCITRAL, Notice of Arbitration Under the Arbitration Rules of 
the United Nations Commission on International Trade Law and the North 
American Free Trade Agreement, APOTEX, Inc. v. the Government of the 
United States, Dec. 10, 2008.
---------------------------------------------------------------------------
    4. Most recently, a consortium of Mexico-domiciled trucking groups 
is initiating a NAFTA Chapter 11 case over the ending of the NAFTA 
trucks pilot program, they may be seeking billions in damages, even 
though very few trucks from Mexico are likely to meet U.S. standards, 
be appropriate for very long international hauling, and even though 
very few such trucks participated in the recent Bush administration 
cross-border trucking program beyond the border zone. The claimants say 
because they pay certification fees they have an investment.\23\
---------------------------------------------------------------------------
    \23\ See Luke Engan, ``Mexican Truckers File NAFTA Investor Claim; 
DOT Gives Proposal To NSC,'' Inside U.S. Trade, April 10, 2009. See 
also, Canacar v. the United States of America, filed April 2, 2009, p. 
6.
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    After an initial wave of WTO cases and NAFTA investor-state 
challenges, enforcement of NAFTA and WTO non-trade policy constraints 
has gotten more subtle. Given that trade attacks on health and 
environmental laws draw terrible press and controversy and are 
expensive to litigate, foreign governments and investors have found 
that merely threatening challenges to chill initiatives rather than 
waiting for their passage and then formally filing against them is a 
cheaper and politically safer tactic.\24\ For instance, after NAFTA 
threats were raised against a Canadian provincial proposal to institute 
a single-payer form of auto insurance, the proposal was dropped. Often 
these cases never come to public attention unless one party leaks the 
documents. Thus, while there is not a long list of formal WTO or NAFTA 
cases against U.S. state policies, increasingly state officials have 
been facing trade agreement threats against state policy initiatives. 
Moreover, the formal cases that have been launched are illustrative of 
the threats that the NAFTA-WTO model poses to normal state governmental 
activity and legislative prerogatives.
---------------------------------------------------------------------------
    \24\ For instance, the European Commission issues an annual list of 
U.S. regulatory policies at the federal, state and local levels that 
they consider trade barriers. On this list are many state policies with 
historical antecedents long preceding the WTO, such as state regulation 
of insurance and alcohol control states. A high-level forum called the 
Transatlantic Economic Council has also been developed to discuss the 
elimination of such ``trade barriers'' on both sides of the Atlantic. 
For the 2007 list of U.S. trade barriers see http://ec.europa.eu/trade/
issues/sectoral/mk_access/pr150207_en.htm.

                                 
               Statement of the U.S. Chamber of Commerce
    The U.S. Chamber of Commerce is the world's largest business 
federation, representing more than three million businesses and 
organizations of every size, sector, and region.
    More than 96 percent of the Chamber's members are small businesses 
with 100 or fewer employees, 70 percent of which have 10 or fewer 
employees. Yet, virtually all of the nation's largest companies are 
also active members. We are particularly cognizant of the problems of 
smaller businesses, as well as issues facing the business community at 
large.
    Besides representing a cross-section of the American business 
community in terms of number of employees, the Chamber represents a 
wide management spectrum by type of business and location. Each major 
classification of American business--manufacturing, retailing, 
services, construction, wholesaling, and finance--is represented. Also, 
the Chamber has substantial membership in all 50 states.
    The Chamber's international reach is substantial as well. It 
believes that global interdependence provides an opportunity, not a 
threat. In addition to the U.S. Chamber of Commerce's 112 American 
Chambers of Commerce abroad, an increasing number of members are 
engaged in the export and import of both goods and services and have 
ongoing investment activities. The Chamber favors strengthened 
international competitiveness and opposes artificial U.S. and foreign 
barriers to international business.
    Positions on national issues are developed by a cross-section of 
Chamber members serving on committees, subcommittees, and task forces. 
More than 1,000 business people participate in this process.
    In the 21st century, investment capital moves across national 
borders as never before. For the average citizen trying to follow who 
owns what--or which companies are buying or merging with others--the 
flow of international investment has caused confusion and uncertainty. 
However, the facts show that no one country or region is ``buying'' 
another. Rather, Americans derive great value on both sides of the 
investment equation.
    The U.S. Chamber of Commerce is a preeminent defender of 
international investment. With scores of policy experts and lobbyists 
on staff, the Chamber works to defend America's traditional openness to 
international investment and to protect the investments U.S. firms make 
in other countries.
Investment from Abroad
    Over the years, the United States has become one of the world's 
principal destinations for foreign direct investment (FDI). By 2007, 
the total stock of FDI in the United States totaled $2.1 trillion.\1\
---------------------------------------------------------------------------
    \1\ Unless otherwise noted, all statistics on investment are from 
the Bureau of Economic Analysis, U.S. Department of Commerce.
---------------------------------------------------------------------------
    Investments by foreign companies in our country have created more 
than 5.3 million American jobs with an annual total payroll of more 
than $350 billion. These numbers do not include the millions of people 
who work for companies that supply parts and materials to foreign-owned 
firms.
    In 2007, U.S. subsidiaries of companies headquartered abroad 
reinvested nearly $70 billion in their U.S. operations. These foreign 
companies have invested heavily in the U.S. manufacturing sector, and 
foreign-headquartered manufacturers account for about a fifth of all 
U.S. exports of manufactured goods. It's impressive to note that U.S. 
affiliates of foreign companies spent $34 billion on research and 
development and $160 billion on plants and equipment in 2007.
    Coupled with home-grown capital and ingenuity, these investments 
give the United States extraordinary access to cutting-edge technology 
and productivity tools. More than 90% of total assets owned by foreign 
companies are from firms based in the developed countries that are 
members of the Organization for Economic Cooperation and Development 
(OECD).
U.S. Investment Abroad
    Americans also derive important benefits from U.S. investment 
abroad. The primary means by which U.S. firms deliver goods and 
services to foreign customers is by investing abroad and creating a 
foreign affiliate. Many workers hired by American companies abroad work 
for these affiliates as they service local markets.
    All told, these affiliates generate substantial earnings for 
American companies. Their sales totaled $4.7 trillion in 2006 \2\--a 
sum more than triple the export earnings of U.S. companies ($1.4 
trillion in 2006). These earnings provide American companies with a 
growing pool of capital to help their companies grow, innovate, and 
create better jobs at home.
---------------------------------------------------------------------------
    \2\ Raymond J. Mataloni, Jr., ``U.S. Multinational Companies--
Operations in 2006,'' Bureau of Economic Analysis, U.S. Department of 
Commerce, November 2008.
---------------------------------------------------------------------------
    A common myth is that overseas hiring by U.S. corporations is all 
about finding cheap labor. While the search for affordable labor drives 
some investment decisions, 70% of U.S. direct investment abroad is 
concentrated in highly developed countries. Europe--a region not known 
for low wages--is home to more than one-half of all U.S. direct 
investment overseas.\3\
---------------------------------------------------------------------------
    \3\ Ibid.
---------------------------------------------------------------------------
    Even with significant investments overseas, about 70% of U.S. 
business investment (including employment and capital expenditures) 
occurs right here in the United States--not in other countries. About 
85% of all research and development by U.S. multinationals is conducted 
in the United States.\4\
---------------------------------------------------------------------------
    \4\ Ibid.
---------------------------------------------------------------------------
    Some foreign workers are hired to produce low-cost goods that are 
shipped back to value-conscious American consumers. However, in 
developing economies, U.S. factories and facilities often stand out as 
models and contribute to raising local labor and environmental 
standards. Workers at these facilities routinely make more than they 
ever had the opportunity to earn in the past. U.S. companies active in 
the developing world are major contributors to social and charitable 
initiatives.
    With lower-value products being produced overseas, Americans can 
focus on high technology, high-value manufactured products, and a broad 
range of professional and business services. In other words, America's 
position in the global economy helps us create and preserve high-skill, 
high-wage jobs.
Securing U.S. Investment Abroad
    The U.S. Chamber is committed to ensuring strong protection of U.S. 
investments overseas. The rule of law, sanctity of contracts, and 
respect for property rights are the touchstones of respect for 
international investment, and the United States should fight for these 
principles in markets around the globe.
    One critical mechanism for extending protections to U.S. investors 
overseas and improving their access to foreign markets is the U.S. 
bilateral investment treaty (BIT) program. This program has enjoyed 
bipartisan support throughout its existence. Over the past quarter 
century, the United States has concluded BITs with 47 countries, and 
similar provisions to protect investments are included in bilateral and 
regional free trade agreements (FTAs).\5\ Over time, U.S. BITs have 
evolved to offer a high standard of protection for investors, as seen 
in the current U.S. ``model BIT.''
---------------------------------------------------------------------------
    \5\ U.S. Department of State.
---------------------------------------------------------------------------
    The BIT program has had the same basic objectives since it was 
launched in 1982: ``protecting United States investment abroad; 
encouraging the adoption of market-oriented investment policies that 
treat private investment in an open, transparent, and nondiscriminatory 
way; and supporting the development of international legal standards 
consistent with these policies.'' \6\
---------------------------------------------------------------------------
    \6\ Daniel S. Sullivan, Assistant Secretary for Economic and 
Business Affairs, U.S. Department of State, written testimony before 
the Senate Committee on Foreign Relations, Washington, D.C., June 12, 
2006: http://montevideo.usembassy.gov/usaweb/paginas/2006/06-
245aEN.shtml.
---------------------------------------------------------------------------
    Bilateral investment treaties provide a level playing field for 
investors by advancing the principle of ``national treatment.'' 
Embraced by Democratic and Republican Administrations for more than two 
decades, this principle gives U.S. investors overseas the same rights, 
privileges, and responsibilities as domestic investors with limited 
exceptions (e.g., for national security).
    Respect for the principle of national treatment is critical to job-
creating investments and efficient global capital markets. The Chamber 
and its members believe the principle of national treatment should not 
be compromised directly or indirectly in ways that would create 
advantages or disadvantages for companies based on whether they are 
headquartered in the United States or elsewhere.
Investor-State Arbitration
    In addition, the ``investor-State'' dispute settlement procedures 
established in BITs and FTAs provide for arbitral panels to resolve 
disputes under international legal standards. These proceedings mirror 
U.S. Constitutional protections against arbitrary government actions 
and against taking of property without compensation. In developing 
countries where local judiciaries are at times slow, ineffective, or 
corrupt, U.S. companies have benefited significantly from recourse to 
``investor-State'' arbitration.
    Investor-State arbitration is rarely employed. For example, a total 
of just over 30 cases was brought under NAFTA's Chapter 11 in all three 
countries over the first ten years after the agreement's entry into 
force. The value of the investments involved in these cases is small 
compared to the hundreds of billions of dollars that U.S. companies 
have invested in countries with which the United States has BITs or 
FTAs. However, even when arbitration is not used, these provisions 
serve as a positive admonition to governments to avoid arbitrary 
actions in commercial disputes lest the case wind up before an 
international arbitration panel.
    In recent years, some critics of the BIT program have expressed 
concern that these provisions somehow grant foreign enterprises rights 
not given to U.S. companies. While the merits of that debate could be 
repeated, the bottom line is that policymakers have definitively taken 
this issue off the table. In 2007, the U.S. free trade agreements with 
Colombia, Panama, Peru, and South Korea were amended to clarify that 
``foreign investors are not hereby accorded greater substantive rights 
with respect to investment protections than domestic investors under 
domestic law where, as in the United States, protections of investor 
rights under domestic law equal or exceed those set forth in this 
Agreement.'' \7\
---------------------------------------------------------------------------
    \7\ This language was included in the text of the four free trade 
agreements mentioned.
---------------------------------------------------------------------------
The Path Forward
    Looking forward, the U.S. Chamber strongly supports negotiating 
BITs with China, India, and Vietnam, and, when circumstances permit, 
with additional large economies such as Brazil and Russia. As other 
countries around the globe pursue their own BITs, decision-makers in 
Washington should be wary of how these may place U.S. companies at a 
competitive disadvantage should the United States lag in its own 
negotiations. In addition, where countries are not yet ready for a 
full-scale BIT, the United States should continue to help interested 
partners to build their own capacity to protect investments through 
Trade and Investment Framework Agreements (TIFAs), which help prepare 
countries for BIT negotiations.
    In addition, it is noteworthy that the State Department's Advisory 
Committee on International Economic Policy (ACIEP) is preparing a task 
force to review the current ``model BIT'' mentioned above. As the 
United States considers negotiating BITs with additional countries with 
different economic structures, negotiators will have to take the 
particularities of local circumstances into consideration.
    For instance, U.S. Chamber policy has long acknowledged that 
``governments often assist their firms through such means as mixed 
credits, co-financing, export credit subsidies and investment promotion 
to obtain and retain business in foreign markets and to capture 
portions of the United States market. These practices persist despite 
the efforts of the U.S. government to eliminate or control them through 
multilateral agreements and through other initiatives to convince 
foreign governments to cease their noncompetitive practices.'' \8\ 
Chamber policy is to support collaboration between the U.S. government 
and business in framing international economic policy--including 
investment policy--especially ``where foreign governments interfere 
with natural market forces, the consequence of which is to put American 
firms at a significant competitive disadvantage.'' \9\ This position 
will continue to inform our advocacy relating to BITs and FTAs in the 
future.
---------------------------------------------------------------------------
    \8\ U.S. Chamber of Commerce, Policy Declarations (approved by the 
Board of Directors).
    \9\ Ibid.
---------------------------------------------------------------------------
Conclusion
    Respect for international investment is a pivotal issue for the 
business environment--at home and abroad. For more than five million 
Americans, our openness to foreign capital means a good job. For 
millions more, it means economic growth, new sales, and enhanced 
competitiveness.
    As U.S. companies invest around the world, ensuring respect for 
their investments is just as critical. As former Secretary of State 
Colin Powell said, ``Capital is a coward; money flees uncertainty and 
corruption. To entice capital in and then keep it in, governments must 
recognize private property rights, deeds of trust, and the sanctity of 
contract, and they must enforce these rights transparently and 
fairly.''
    The principles of the rule of law, sanctity of contracts, and 
respect for property rights are at the heart of U.S. international 
economic policy. Their protection should always be at the fore of 
policymakers' concerns, even in countries where formal investment 
protection agreements remain a distant goal. The U.S. Chamber of 
Commerce is committed to working with Congress to ensure that 
investment treaties and free trade agreements help to advance these 
principles.

                                 
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