[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
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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.''
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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:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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.
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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.
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\1\ Enacted as part of the Trade Act of 2002, Title XXI, Section
2102(c), Pub. L. 107-210 (2002).
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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\
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\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.
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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).
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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.
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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.
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\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.
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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.
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\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\
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\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\
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\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).
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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.
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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.
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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.
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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.
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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.
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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\
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\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.
---------------------------------------------------------------------------
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.''
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\5\ U.S. Department of State.
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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\
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\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.
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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\
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\7\ This language was included in the text of the four free trade
agreements mentioned.
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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.
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\8\ U.S. Chamber of Commerce, Policy Declarations (approved by the
Board of Directors).
\9\ Ibid.
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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.