[Senate Executive Report 109-17]
[From the U.S. Government Publishing Office]



109th Congress                                              Exec. Rept.
                                 SENATE
 2d Session                                                      109-17

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



 
 TREATY BETWEEN THE UNITED STATES OF AMERICA AND THE ORIENTAL REPUBLIC 
 OF URUGUAY CONCERNING THE ENCOURAGEMENT AND RECIPROCAL PROTECTION OF 
                     INVESTMENT (TREATY DOC. 109-9)

                                _______
                                

                August 30, 2006.--Ordered to be printed

  Filed under authority of the order of the Senate of August 3, 2006.

                                _______
                                

          Mr. Lugar, from the Committee on Foreign Relations,
                        submitted the following

                              R E P O R T

                    [To accompany Treaty Doc. 109-9]

    The Committee on Foreign Relations (``committee''), to 
which was referred the Treaty Between the United States of 
America and the Oriental Republic of Urguay Concerning the 
Encouragement and Reciprocal Protection of Investment, with 
Annexes and Protocol, signed at Mar del Plata on November 4, 
2005 (``Proposed BIT'') (Treaty Doc. 109-9), having considered 
the same, reports favorably thereon and recommends that the 
Senate give its advice and consent to ratification thereof, as 
set forth in this report and the accompanying resolution of 
advice and consent to ratification.

                                CONTENTS

                                                                   Page

  I. Purpose..........................................................1
 II. Background.......................................................2
III. Summary of Key Provisions........................................2
 IV. Committee Action.................................................9
  V. Committee Recommendation and Comments............................6
 VI. Resolution of Advice and Consent to Ratification.................9
VII. Appendix: Hearing--U.S.-Uruguay Bilateral Investment Treaty.....11

                               I. Purpose

    The basic purposes of the bilateral investment treaty 
(``BIT'') program are to: protect investment abroad in 
countries where investors' rights are not already protected 
through existing agreements, such as free trade agreements; 
encourage the adoption of market oriented domestic policies 
which treat foreign investment in an open, transparent, and 
non-discriminatory manner; and support the development of 
international law standards consistent with these objectives. 
There are six primary benefits which flow to parties whose 
investments are covered by BITs. First, a BIT provides that 
investors and their ``covered investments'' are entitled to be 
treated as favorably as the host country treats its own or 
third country investments. Second, it provides a defined limit 
on the expropriation of investments and for prompt payment of 
adequate and effective compensation if and when expropriation 
may take place. Third, it provides for transferability of funds 
into and out of the host country without undue delay under a 
market rate of exchange and encompasses all transfers related 
to a covered investment, creating a predictable environment. 
Fourth, it limits circumstances in which performance 
requirements can be imposed. Fifth, it gives investors from 
each country the right to submit an investment dispute with the 
treaty partner's government to international arbitration, 
rather than domestic courts. Finally, a BIT gives investors the 
ability to utilize management personnel of their choice, 
regardless of nationality.\1\
---------------------------------------------------------------------------
    \1\ U.S. Bilateral Investment Treaty Program, Fact Sheet, Bureau of 
Economic and Business Affairs, November 7, 2005; www.state.gov/e/eb/
rls/fs/22422.htm
---------------------------------------------------------------------------

                             II. Background

    The United States and Uruguay announced their intent to 
negotiate a BIT on November 21, 2003, at the conclusion of the 
ministerial meeting of the Free Trade Agreement of the Americas 
in Miami, Florida. According to the negotiating parties, the 
decision to pursue BIT negotiations emerged from work conducted 
by the United States-Uruguay Joint Commission on Trade and 
Investment, which was created in 2002 to enhance trade and 
investment relations between the two countries. Negotiations 
began in the spring of 2004 and were concluded on September 7 
of that year. The treaty was signed on November 4, 2005 and was 
approved by the Uruguayan legislature in December 2005. It was 
submitted to the United States Senate for advice and consent to 
ratification on April 4, 2006.
    The Proposed BIT is the 40th such treaty concluded by the 
United States, but the first negotiated since 1999. It is the 
first BIT negotiated on the basis of a new U.S. model BIT text, 
which was completed in 2004. The new model BIT is intended to 
encompass certain objectives from the Bipartisan Trade 
Promotion Authority Act of 2002.\2\ The model also contains 
similar provisions to the investment chapters of recently 
negotiated free trade agreements. U.S. business interests have 
indicated their support for the Proposed BIT.\3\
---------------------------------------------------------------------------
    \2\ See, e.g., Sec. 2102(b)(3) of P.L. 107-210 (19 U.S.C. 
Sec. 3802(b)(3)).
    \3\ Through communications with the committee, business groups such 
as the Emergency Committee for American Trade and The National Foreign 
Trade Council have recently indicated their support for approval of the 
proposed treaty.
---------------------------------------------------------------------------

                     III. Summary of Key Provisions

    A detailed article-by-article discussion of the Proposed 
BIT is attached to the Letter of Transmittal from the Secretary 
of State to the President, which is reprinted in full in Treaty 
Document 109-9. A summary of the key provisions of the Proposed 
BIT is set forth below.

                               ARTICLE 1

    Definitions. The Proposed BIT defines the term 
``investment'' broadly: the term 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.'' The definition contains a non-exclusive list of the 
forms that an investment may take, beginning with an 
``enterprise,'' and including, inter alia, equity, bonds, 
futures, turnkey operations, intellectual property rights, 
licenses and authorizations conferred under domestic law, and 
other tangible or intangible, movable or immovable property and 
related property rights, such as leases and the like. An 
``enterprise'' includes non-profit as well as commercial 
entities and both private and governmentally owned or 
controlled firms. An ``investor of a Party'' is ``a Party or 
state enterprise thereof, or a national or an enterprise of a 
Party, that attempts to make, is making or has made an 
investment in the territory of the other Party; provided, 
however, that a natural person who is a dual citizen shall be 
deemed to be exclusively a citizen of the State of his or her 
dominant and effective citizenship.'' A ``covered investment'' 
means, with respect to a Party ``an investment in its territory 
of an investor of the other Party in existence as of the date 
of entry into force of this Treaty or established, acquired, or 
expanded thereafter.''

                               ARTICLE 2

    Scope and Coverage. The Proposed BIT applies to ``measures 
adopted or maintained by a Party relating to: (a) investors of 
the other Party; (b) covered investments; and (c) with respect 
to Articles 8, 12, and 13 (regarding transparency of investment 
laws and regulations, environment, and labor) all investment in 
the territory of the Party.'' The obligations in Articles 1-22 
apply to state enterprises or other persons exercising any 
governmental authority delegated to it by the Party as well as 
to the political subdivisions of the Party.

                               ARTICLE 3

    National Treatment. This article requires each Party to 
accord national treatment to investors of the other Party and 
to covered investments with respect to the entire life cycle of 
an investment. National treatment is deemed to be ``treatment 
no less favorable than that it accords, in like circumstances'' 
to its own investors or to investments in its territory of its 
own investors, as the case may be. With regard to regional 
governments, it is defined as ``treatment no less favorable 
than the treatment accorded, in like circumstances'' by the 
regional government ``to natural persons resident in and 
enterprises constituted under the laws of other regional levels 
of government and to their respective investments.''

                               ARTICLE 4

    Most Favored Nation Treatment. Under this article, Parties 
are required to grant to investors of the other Party and to 
covered investments the treatment no less favorable than that 
accorded ``in like circumstances'' to non-Party investors and 
to investments in its territory by non-Party investors, 
respectively, with respect to the activities listed in Article 
3.

                         ARTICLE 5 AND ANNEX A

    Minimum Standard of Treatment. This article establishes a 
minimum standard of treatment that each Party owes to covered 
investments. The minimum standard of treatment is defined as 
``treatment in accordance with customary international law, 
including fair and equitable treatment and full protection and 
security.'' It also states that a breach of another provision 
of the Proposed BIT or of a separate international agreement 
would not necessarily constitute a breach of this article.

Annex A

    Annex A contains the understanding of the Parties that 
``customary international law,'' as referenced generally in the 
Proposed BIT, and as specifically mentioned in Article 5 
``results from a general and consistent practice of States that 
they follow from a sense of legal obligation.'' For purposes of 
Article 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.''

                         ARTICLE 6 AND ANNEX B

    Expropriation and Compensation. This article states that 
neither Party may expropriate or nationalize a covered 
investment, directly or indirectly, unless for a public 
purpose, in a non-discriminatory manner, with compensation, and 
in accord with due process and the treaty's minimum standard of 
treatment requirements. Compensation must be timely and 
equivalent to the value of the expropriated investment 
immediately before the expropriation.

Annex B

    Annex B states the understanding of the parties that 
Article 6 reflects customary international law, and that 
expropriation results only when the state's interference is 
with a property right in an investment. Annex B further 
explains that Article 6 addresses two types of expropriation: 
direct expropriation, involving formal transfer of title or 
outright seizure, and indirect expropriation, involving a case-
by-case inquiry that considers the economic impact of the 
government action, its interference with investment-backed 
expectations, and its character. Under paragraph 4(b) of Annex 
B, the Parties confirm their shared understanding that, except 
in rare circumstances, nondiscriminatory regulation ``to 
protect legitimate public welfare objectives, such as public 
health, safety, and the environment,'' do not constitute 
indirect expropriation.

                               ARTICLE 7

    Transfers. This article requires each Party to permit all 
transfers relating to a covered investment to be made freely 
and without delay into and out of its territory, thus ensuring 
that an investor may repatriate funds associated with 
investment activities. Such transfers are expressly deemed to 
include contributions to capital; profits, dividends, capital 
gains, and proceeds from the sale or liquidation (or any 
partial sale or liquidation) of the investment; interest, 
royalty payments, and various fees; contract payments; 
compensation from expropriations; restitution for losses 
resulting from war or armed conflict or civil strife; and 
payments arising out of a dispute. Transfers must be allowed to 
be made in a freely usable currency at the market rate of 
exchange prevailing on the date of transfer.

                               ARTICLE 8

    Performance Requirements. This article prohibits the 
Parties from imposing requirements on the establishment, 
acquisition, expansion, management, conduct, operation, or sale 
or other disposition of an investment of an investor of a Party 
or of a non-Party in its territory that may impair the 
profitability and competitiveness of an investment. In 
addition, neither Party may condition the receipt, or continued 
receipt, of an advantage during the life-cycle of an investment 
of a Party or of a non-Party on compliance with certain 
specified requirements in this article. A Party may, however, 
condition the receipt or continued receipt of an advantage on 
compliance with a requirement to locate production, supply a 
service, train or employ workers, construct or expand 
particular facilities, or carry out research or development in 
its territory. The prohibition on technology transfer 
requirements does not apply with regard to certain measures 
consistent with the WTO Agreement on Trade-Related Intellectual 
Property Rights or when the requirement is designed to remedy a 
practice determined after judicial or administrative process to 
be anti-competitive under the Party's competition laws.

                               ARTICLE 9

    Senior Management and Boards of Directors. This article 
states that a Party may not place a nationality requirement on 
the individuals appointed to senior management of an enterprise 
of the Party that is a covered investment, but may require that 
a majority of the board of directors, or a committee of the 
board, be of a particular nationality, or resident in its 
territory, provided that the requirement does not ``materially 
impair'' the investor's ability to exercise control over its 
investment.

                               ARTICLE 12

    Investment and Environment. In this article the Parties 
recognize that it is ``inappropriate to encourage investment by 
weakening or reducing the protections afforded domestic 
environmental laws'' and are required to ``strive to ensure'' 
that they do not waive or offer to waive such laws in a way 
that ``weakens or reduces the protections afforded in those law 
as an encouragement for'' an investment in its territory. If 
one Party considers that the other has offered such an 
encouragement, it may request consultations and the Parties are 
to consult with the aim of ``avoiding any such encouragement.'' 
Nothing in the Proposed BIT may prevent a Party from taking any 
measure otherwise consistent with the Proposed BIT ``that it 
considers appropriate to ensure that investment activity in its 
territory is undertaken in a manner sensitive to environmental 
concerns.''

                               ARTICLE 13

    Investment and Labor. In this article the Parties recognize 
that it is ``inappropriate to encourage investment by weakening 
or reducing the protections afforded in domestic labor laws'' 
and are required to ``strive to ensure'' that they do not waive 
or offer to waive such laws in order to encourage investment 
``in a manner that weakens or reduces adherence to the 
internationally recognized labor rights'' listed in the 
article. It also provides that nothing in the Proposed BIT may 
be construed to prevent a Party from taking any measure 
otherwise consistent with the Proposed BIT ``that it considers 
appropriate to ensure that investment activity in its territory 
is undertaken in a manner sensitive to labor concerns.''

                   ARTICLE 14, AND ANNEXES I, II, III

    Non-Conforming Measures. This article provides that 
Articles 3, 4, 8, and 9 (regarding, respectively, national 
treatment, MFN treatment, performance requirements, engagement 
of senior management) do not apply to non-conforming central 
and regional government measures listed in a Party's Schedule 
to Annexes I or III, or to a local level of government. In 
addition, these articles will not apply to any measure that a 
Party adopts or maintains with respect to sectors, sub-sectors, 
or activities listed in its Schedule to Annex II.

                               ARTICLE 17

    Denial of Benefits. This article allows a Party to deny 
benefits to enterprises and investments if persons of a non-
Party own or control the enterprise and the denying Party (1) 
does not maintain diplomatic relations with the non-Party or 
(2) adopts or maintains measures with regard to the non-Party 
that prohibit transactions with the enterprise or that would be 
circumvented if the treaty benefits were accorded to the 
enterprise.

                               ARTICLE 18

    Essential Security. This article contains an exception for 
measures related to a Party's essential security interests.

                               ARTICLE 20

    Financial Services. This article provides extensive 
provisions regarding financial services and special procedures 
for disputes in the area. A Party is not prevented from 
``adopting or maintaining measures relating to financial 
services for prudential reasons . . . or to ensure the 
integrity or stability of the financial system.'' The term 
``prudential reasons'' is understood to include ``the 
maintenance of the safety, soundness, integrity, or financial 
responsibility of individual financial institutions.'' This 
article also sets forth special procedures for State-to-State 
disputes involving financial services.

                               ARTICLE 21

    Taxation. This article specifies that the Proposed BIT does 
not apply to ``taxation measures'' except as provided in 
Article 21. It does not affect the rights and obligations of a 
Party under any tax convention, and to the extent that there is 
an inconsistency between a tax convention and the Proposed BIT, 
the tax convention prevails. Departing from the 2004 Model, it 
provides that national treatment and MFN obligations apply to 
all taxation measures other than tax measures relating to 
direct taxes (i.e., income and capital gains taxes, estate and 
gift taxes, and the like). In addition, the expropriation 
article applies to all taxation measures, except that if an 
investor-state claimant asserts that an expropriation is 
involved, the claimant may only submit the claim to arbitration 
if the claimant had first referred the issue in writing to the 
competent tax authorities of both Parties and the Parties 
failed to agree, within 180 days after the date of the 
claimant's referral, that the measure was not an expropriation.

                             ARTICLES 23-34

    Investor-State Dispute Settlement. Article 24 provides that 
if a disputing party considers that a dispute cannot be 
resolved through consultations and negotiations, the claimant 
may initiate arbitration. An investor may file a claim at least 
six months after the ``events giving rise to the claim'' and 
may do so under the ICSID Convention, the ICSID Additional 
Facility Rules, the UNCITRAL Arbitration Rules, or if the 
disputing parties agree, to any other arbitral mechanism. The 
arbitration rules invoked by the claimant will govern the 
arbitration except as modified by the Proposed BIT.
    Article 26 provides that claims cannot be submitted if more 
than three years have elapsed from the date on which the 
claimant acquired (or should have acquired) knowledge of the 
alleged breach and knowledge that loss or damage was incurred. 
The claimant must consent in writing to arbitration according 
to conditions set out in the Proposed BIT and the claim must be 
accompanied by a waiver of the right to initiate or continue 
before any administrative tribunal or court under the law of 
either Party, or under other dispute settlement procedures, any 
proceeding with respect to any measures alleged to constitute 
the breach.
    Article 27 addresses the selection of arbitrators. 
Tribunals are normally to be composed of three arbitrators, one 
appointed by each of the Parties and the third and presiding 
arbitrator, appointed by agreement of the Parties. Except as 
provided for financial services disputes, if a tribunal is not 
constituted within 75 days of the date the claim is submitted, 
the Chairman of the ICSID Administrative Council, on request of 
a disputing Party, is to appoint the remaining panelists.
    Article 28 governs the conduct of the arbitration, 
including the venue, the ability of the non-disputing party to 
make oral and written submissions to the tribunal, and the 
possibility of amicus briefs from a non-disputing person or 
entity. It also provides that the tribunal may award an interim 
award of protection to preserve a disputing party's rights.
    Article 29 provides for transparency in arbitral 
proceedings, requiring that documents be made public and that 
the tribunal conduct hearings open to the public, and Article 
30 addresses the law that the arbitrators are to apply in the 
proceedings.
    Article 34 specifies that a tribunal may award only 
monetary damages and any applicable interest, and restitution 
of property, in which case the award is to provide that the 
respondent may pay monetary damages and any applicable interest 
in lieu of restitution. The tribunal may also award costs and 
attorney's fees in accordance with the Proposed BIT and the 
applicable arbitration rules; a tribunal may not award punitive 
damages. The award has no binding force except between the 
disputing parties and with regard to the particular case. Each 
Party must provide for the enforcement of an award within its 
territory and, where a Party fails to abide by or comply with 
an award, the non-disputing Party may seek State-to-State 
dispute settlement under Article 37.

                               ARTICLE 37

    State-to-State Dispute Settlement. This article sets forth 
dispute settlement procedures between states. Except for 
disputes arising under Articles 12 and 13 (environment and 
labor), any dispute between the Parties concerning the 
interpretation or application of the Proposed BIT that is not 
resolved through consultations or other diplomatic means is to 
be submitted, at the request of a Party, to binding arbitration 
by a tribunal in accordance with international law. Where there 
is no agreement by the Parties, the UNCITRAL Arbitration rules 
are to apply, except as modified by the Parties or the Proposed 
BIT. Generally, tribunals are to consist of three arbitrators, 
one appointed by each Party and the presiding arbitrator 
appointed by agreement of the Parties. If a panel is not 
constituted within 75 days after a claim is submitted, the 
Chairman of the ICSID Administrative Council, on request of a 
disputing Party, is to appoint the remaining arbitrators.

                                ANNEX C

    Submission of a Claim to Arbitration. Annex C departs from 
the 2004 Model in placing a special limitation on U.S. 
investors seeking local remedies in the territory of the other 
Party. Specifically, a U.S. investor may not submit to 
investor-State arbitration a claim that Uruguay has breached an 
obligation under Articles 3-10 if the investor has alleged that 
breach of the obligation in proceedings before a court or 
administrative tribunal of Uruguay. The limitation reflects the 
fact that treaty claims may be brought in Uruguayan local 
courts.

                                ANNEX F

    Financial Services. Annex F, a departure from the 2004 
Model BIT, expands on the obligations that the Parties 
undertake under Article 3 (national treatment) and Article 4 
(MFN treatment) regarding a ``financial institution of the 
other Party'' (defined for the purposes of paragraphs 1 and 2 
as ``a financial institution, including a branch, located in 
the territory of a Party that is controlled by persons of the 
other Party''). It further provides in paragraph 4 that no 
claim that a measure relating to an investor of a Party, or a 
covered investment, in a ``financial institution'' (defined for 
the purposes of paragraph 4) located in the other Party 
breaches Article 3 or 4 may be submitted to investor-State 
arbitration.

                                ANNEX G

    Sovereign Debt Restructuring. Annex G, which addresses 
investor-State claims involving sovereign debt restructuring by 
Uruguay, is another departure from the Model BIT. The Annex 
states that no claims that the ``restructuring of a debt 
instrument issued by Uruguay'' breaches an obligation in 
Articles 5 though 10 may be submitted for investor-State 
arbitration if the restructuring is a ``negotiated 
restructuring,'' as defined in the Annex, at the time the claim 
is submitted or becomes one after submission of the claim. A 
U.S. investor may not submit a claim for investor-State 
arbitration that a ``restructuring of debt issued by Uruguay'' 
breaches an obligation under Articles 5 through 10 unless 270 
days have elapsed from the date of the events giving rise to 
the claim.

                          IV. Committee Action

    The committee held a public hearing on the Proposed BIT on 
June 12, 2006. The hearing was chaired by Senator Lugar.\4\ The 
committee considered the proposed treaty on August 1, 2006, and 
ordered the proposed treaty favorably reported by voice vote, 
with a quorum present and without objection, with the 
recommendation that the Senate give advice and consent to its 
ratification, as set forth in this report and the accompanying 
resolution of advice and consent to ratification.
---------------------------------------------------------------------------
    \4\ A transcript of the June 12, 2006 hearing is included as an 
appendix to this report.
---------------------------------------------------------------------------

                V. Committee Recommendation and Comments

    On balance, the committee believes that the Proposed BIT is 
in the interest of the United States and urges that the Senate 
act promptly to give advice and consent to ratification. The 
committee urges the executive branch to continue to work with 
interested parties, including those in the U.S. business 
community, to ensure the highest standards of protection for 
U.S. investors overseas.

          VI. Resolution of Advice and Consent to Ratification

    Resolved (two-thirds of the Senators present concurring 
therein),  That the Senate advise and consent to the 
ratification of the Treaty between the United States of America 
and the Oriental Republic of Uruguay Concerning the 
Encouragement and Reciprocal Protection of Investment, with 
Annexes and Protocol, signed at Mar del Plata on November 4, 
2005 (Treaty Doc. 109-9).
    VII. Appendix: Hearing--U.S.-Uruguay Bilateral Investment Treaty

                              ----------                              




                U.S.-URUGUAY BILATERAL INVESTMENT TREATY

                              ----------                              


                         MONDAY, JUNE 12, 2006

                                       U.S. Senate,
                            Committee on Foreign Relations,
                                                     Washington DC.
    The committee met, pursuant to notice, at 3:03 p.m. in Room 
SD-419 Dirksen Senate Office Building, Hon. Richard G. Lugar, 
chairman of the committee, presiding.
    Present: Senator Lugar.

          OPENING STATEMENT OF HON. RICHARD G. LUGAR,
                   U.S. SENATOR FROM INDIANA

    The Chairman. This hearing of the Foreign Relations 
Committee is called to order. The committee meets today to 
review the Bilateral Investment Treaty with Uruguay, which was 
signed last fall. This agreement promotes investment and 
economic cooperation with a friend and partner in the Western 
Hemisphere. It would deliver important benefits to the United 
States, and it would reinforce the significant economic reforms 
that Uruguay has undertaken in the recent past.
    The agreement has already been approved overwhelmingly by 
both houses of the Uruguayan legislature. This support is a 
measure of President Vazquez's political leadership and his 
commitment to build a stronger political and economic 
relationship between Uruguay and the United States.
    More than 80 United States companies have operations in 
Uruguay. The United States became Uruguay's largest export 
market in 2004. In the absence of the Free Trade Agreements of 
the Americas that facilitates trade on a hemispheric scale, we 
should move forward where we can to create open markets on a 
bilateral basis. Consequently, the United States should 
consider whether the groundwork laid by this bilateral 
investment treaty could be expanded into a full Free Trade 
Agreement with Uruguay.
    I encourage the administration to continue its successful 
pursuit of bilateral investment treaties. These agreements open 
opportunities for our domestic companies and establish greater 
security for mutual investments. They promote open, 
transparent, and nondiscriminatory treatment of private 
investment, which is essential to ensuring that American 
companies can compete equitably in foreign markets. Cooperation 
on the commercial front also enhances our broader relationships 
with other nations.
    I welcome our distinguished witness, Mr. Daniel Sullivan, 
and congratulate him on his recent confirmation as Assistant 
Secretary of State for Economic and Business Affairs. The 
committee looks forward to our discussion about the treaty. And 
in a moment, we look forward to the testimony of Secretary 
Sullivan. Would you please proceed and let me indicate at the 
offset that your full statement will be made a part of the 
record. You may deliver it in full or summarize, as you wish.

 STATEMENT OF HON. DANIEL S. SULLIVAN, ASSISTANT SECRETARY FOR 
ECONOMIC AND BUSINESS AFFAIRS, DEPARTMENT OF STATE, WASHINGTON, 
                              D.C.

    Mr. Sullivan.  Thank you, Mr. Chairman. I would like to 
just summarize the key points of my written testimony. And 
thank you for the opportunity to testify before your committee, 
today. The administration strongly recommends that the Senate 
give its advice and consent to the U.S./Uruguay Bilateral 
Investment Treaty. This treaty will protect the rights of U.S. 
investors in Uruguay; create opportunities for U.S. exports to 
Uruguay; and promote growth, economic reform and greater 
awareness of the benefits of open investment and trade regimes 
both in Uruguay and throughout the region.
    This is also the first such treaty negotiated on the basis 
of the new U.S. 2004 model BIT, which was developed in 
consultation with this committee, other members of Congress, 
the private sector, NGOs, and your staff. The new model BIT, 
like the older one, is a valuable tool to promote sound 
investment policies, and economic growth with our partners.
    The 2004 model draws on our experience with the NAFTA and 
is similar to the investment provisions in the FTAs that we've 
been negotiating. It enhances the core investment principles 
that have been the foundation of our BIT program for more than 
20 years. The Uruguay BIT conforms closely to the new model. 
Although Uruguay is a small country, it is an important 
political and economic partner for the United States in the 
Americas.
    The United States is one of Uruguay's largest trading 
partners, and President Bush and President Vazquez agreed last 
month to broaden and deepen our economic and trading 
relationship. A BIT with Uruguay would be an important 
milestone in our growing economic partnership, will provide 
strong protections for U.S. investors, and will reinforce 
Uruguay's commitment to free and open trade in investment.
    I thank the committee for its consideration of this treaty 
and I will be glad to answer any questions that you may have. 
Thank you, Mr. Chairman.

    [The prepared statement of Mr. Sullivan follows:]

                Prepared Statement of Daniel S. Sullivan

    Chairman Lugar, ranking member Biden, members of the committee, and 
staff: Thank you for the opportunity to testify before the Senate 
Foreign Relations Committee as the administration seeks the advice and 
consent of the Senate to ratification of the U.S.-Uruguay Bilateral 
Investment Treaty.
    The administration strongly recommends that the Senate give its 
advice and consent to the U.S.-Uruguay Bilateral Investment Treaty 
(BIT). This treaty, the first negotiated on the basis of the text of 
the new U.S. 2004 Model BIT, will protect the rights of U.S. investors 
in Uruguay. It will also serve to promote a more open investment and 
trade regime in the region and potentially more broadly in Latin 
America.
    The United States, with over $2 trillion invested abroad as of 
2004, has a major stake in extending protections to our investors and 
improving their access to foreign markets. The U.S. BIT program, which 
has enjoyed bipartisan support throughout its existence, is a key tool 
in that effort. Over the past 24 years, the BIT program has had the 
same basic objectives: Protecting United States investment abroad; 
encouraging the adoption of market-oriented investment policies that 
treat private investment in an open, transparent, and non-
discriminatory way; and supporting the development of international 
legal standards consistent with these policies.
    The BIT program was initiated to promote and protect U.S. investors 
in other countries by building on the principles contained in earlier 
Treaties of Friendship, Commerce and Navigation (FCN). The program has 
helped to reinforce sound investment policy in a variety of developing 
nations and in economies that have undertaken the transition from 
central planning. By creating conditions more favorable to U.S. private 
investment, these treaties assist countries in their efforts to develop 
the private sector, thereby strengthening their economies. Furthermore, 
as more nations agree to conclude a BIT with the United States, the 
important investment principles they contain gain wide acceptance and 
contribute to the development of international law in directions 
consistent with U.S. interests.
    Since the inception of the Bilateral Investment Treaty program in 
1982, the United States has concluded 46 BITs, 39 of which have entered 
into force. We have active discussions underway with Pakistan and are 
exploring potential BITs with several other countries. The Department 
of State and the United States Trade Representative co-lead 
negotiations with the support of Commerce, Treasury, and other 
agencies.
    BITs are negotiated on the basis of a model text that has been 
periodically updated. The most recent revision of the model BIT was 
completed in 2004, and, as noted earlier, is the model on which the 
U.S.-Uruguay Treaty is based. The 2004 model text embodies the same 
basic investment principles as its predecessors. It is similar to the 
investment provisions of the North American Free Trade Agreement 
(NAFTA) and, in keeping with our policy of maintaining consistency 
across our agreements, is very similar to the investment chapters of 
our recently-concluded free trade agreements, including those with 
Chile, Singapore, five Central American countries and the Dominican 
Republic (CAFTA-DR), Morocco, Australia, Oman, Peru, and Colombia.
    In addition to containing greater specificity than earlier model 
texts with respect to key provisions, our new model text contains 
several clarifications and procedural innovations designed to eliminate 
or deter frivolous claims and to make the investor arbitration process 
more efficient and transparent.
    Our BIT with Uruguay conforms very closely with the new model and 
embodies the following core protections: (1) national treatment and 
most-favored nation treatment both before and after the establishment 
of an investment, which creates a level playing field for U.S. 
investors; (2) a minimum standard of treatment based on customary 
international law; (3) international law principles governing 
expropriation; (4) limitations on performance requirements, such as 
local content requirements; (5) the right to hire senior managers of 
their choice; (6) improved transparency with respect to investment-
related laws and regulations; (7) a guarantee of free transfers of 
investment-related funds; and (8) binding international arbitration of 
investment disputes that can be invoked either by investors or by the 
Parties to the agreement.
    Although Uruguay is a relatively small country, it has long been an 
important partner for the United States in the Americas. Our bilateral 
economic relationship has grown more important in recent years. In 
1998, Uruguay sent over 55% of its exports to Mercosur countries.
    By 2004, the United States had overtaken Mercosur as Uruguay's 
number one trading partner. The United States is also Uruguay's largest 
single source of foreign investment, with an accumulated stock of 
investment of over $600 million. Uruguay's GDP in 2005 was 
approximately $16.8 billion; its GDP growth in 2005 is estimated to be 
an impressive 6.6%, with export and investment growth rates of 16% and 
20%, respectively. Uruguay's economy is projected to grow by 4.8% in 
2006.
    In 2004, the U.S.-Uruguay Joint Commission on Trade and Investment 
launched the negotiations that led to this BIT, and the Treaty was 
originally signed in Montevideo, just days before the election of the 
new Uruguayan President, Tabare Vazquez, on October 31, 2004.
    Following President Vazquez's inauguration in March 2005, his party 
began to examine the BIT and its options for proceeding. In September 
2005, President Vazquez requested that the United States make several 
small changes to the text to accommodate Uruguayan concerns. The United 
States was able to agree to two of these proposed changes, and the text 
was altered and re-signed at the Summit of the Americas in Mar del 
Plata, Argentina, on November 5, 2005. The Uruguayan Parliament 
completed its domestic ratification procedures for the Treaty on 
December 27, 2005. President Bush transmitted the Treaty to the Senate 
on April 4, 2006.
    The U.S.-Uruguay BIT differs in minor respects from the 2004 model 
BIT text. None of these differences represent departures from core BIT 
principles. The most important changes derived from Uruguay's desire to 
maintain flexible oversight of its financial sector. For example, one 
change prohibits all investor-state claims, except fro discrimination, 
for negotiated sovereign debt restructurings carried out under 
collective action clauses and certain other processes. Another 
arbitration-related difference form the model bars U.S. investors from 
submitting claims to investor-state arbitration if the investor or 
enterprise had previously alleged the same breach of a BIT obligation 
before a Uruguayan court or tribunal.
    The Treaty text also includes a new clause to the Labor and 
Investment Article clarifying that a Party may adopt any non-
discriminatory measure to ensure that investment is conducted in a 
manner sensitive to labor concerns provided the measure is otherwise 
consistent with the Treaty. This language is similar to the provision 
in the model text on environmental concerns. Other changes include 
relatively minor changes in defined terms, and other small, technical 
changes. A full description of each part of the Treaty text, including 
the departures from the model, has been included in the transmittal 
package, immediately following the end of the Treaty text.
    In conclusion, the U.S.-Uruguay BIT will help protect the rights of 
U.S. investors in Uruguay; create more opportunities for U.S. exports 
to Uruguay by stimulating our already strong bilateral economic ties; 
and promote growth, continued economic reform, and greater awareness of 
the benefits of open investment and trade regimes. In addition, the 
U.S.-Uruguay BIT is the first of what we expect will be a new series of 
BITs based on the 2004 model text--BITs that will have more robust 
protections for U.S. investors than we have had in the past. These BITs 
will preserve the legitimate regulatory prerogatives of the United 
States and its negotiating partners, protect U.S. investors, and 
promote open and fair investment policies around the world. I thank the 
committee for its consideration of this treaty and I will be glad to 
answer any questions.

    The Chairman. Let me just indicate, as you've pointed out, 
that the two Presidents met and discussed further deepening of 
our relationship, especially our trading ties, specifically 
now. I just raise the overall question, trying to outline how 
the administration is proceeding to accomplish these goals. And 
I touched upon this in the opening statement. After a 
successful conclusion of this investment treaty, isn't a Free 
Trade Agreement a natural step in the direction of deepening of 
these ties? Wouldn't a free trade agreement with Uruguay be in 
accordance with the U.S. Building Block Strategy in this 
region?
    Mr. Sullivan.  Thank you, Mr. Chairman. As you know and as 
you mentioned at the outset, the administration has been 
pursuing policies to increase trade and investment throughout 
Latin America through a number of different kinds of economic 
tools. I should note that I think, in a lot of ways, we've made 
significant progress in this regard. The statistic, I believe, 
that is most informative is--if you looked at the current FTAs 
that we either have, or that we are negotiating, or have 
completed--that the economies represented by those FTAs would 
account for over two-thirds of the GDP of the Western 
Hemisphere, without including the United States. So, there's 
been significant progress on that front.
    As you mentioned, and as I stated in my opening remarks, 
President Bush and President Vazquez met and committed to 
deepening that economic relationship. The BIT is primarily the 
way that we're looking at doing that right now. There are a 
number of economic issues that can be addressed by the BIT, but 
it will also, as you mentioned, help the economic reform 
program that the Uruguayan government is committed to.
    So, with regard to next steps in that relationship, the BIT 
is the primary focus. Specifically, with regard to an FTA, as 
you know, that is a process that requires significant 
consultation. Oftentimes, looking at potential FTA partners, 
there are a lot of issues that need to be addressed first, in 
terms of economic or investment issues. But as you know, prior 
to moving to an FTA, the consultation process on that decision, 
not only includes our potential partners, but the Congress, the 
private sector, and the interagency. And in terms of the 
specific question regarding an FTA with Peru, I think it might 
be a little bit premature to get into specifics, because I 
think that we're kind of at the beginning stages of that 
consultation process, Mr. Chairman.
    The Chairman. Well, without pressing the issue, is the 
Brazilian influence in the area a factor in consideration of a 
free trade agreement? Does that play into the situation at all?
    Mr. Sullivan.  I think the answer to that is, we have said 
and I believe Ambassador Portman has said, with regard to trade 
in the Hemisphere, we welcome deepening our trading and 
investment relationship with all countries including those in 
Mercosur.
    The Chairman. In which Brazil is a major factor.
    Mr. Sullivan.  That's right. That's correct. But, with 
regard to whether or not there's a prospect--well, let me back 
up here. With regard to the BIT, my understanding is that we 
haven't heard anything with regard to whether or not the 
Brazilian government has been supportive of this so we're 
assuming that is has. As I mentioned, it's an important 
building block.
    So again, I want to get back to the point. It's more an 
issue of going through the consultations that we need to do, 
both in terms of domestic audiences, the Hill, private sector, 
and our trading partners in the area to--where we would move 
forward on that issue. So, I do not believe that the specific 
issue of Brazil, with regard to that question, has been raised 
and I am not aware of it.
    The Chairman. For those listening to our dialogue and 
hearing the word BIT used, let me just indicate, as you have 
already, that this is the Bilateral Investment Treaty. And we 
have such treaties with 39 countries, according to our 
committee information.
    What factors are a criteria for considering which countries 
are going to be possibilities for negotiation of a Bilateral 
Investment Treaty? And what was the impetus for seeking this 
particular treaty with Uruguay at this time? Was it the meeting 
of the two Presidents, or were there other factors that entered 
into this?
    Mr. Sullivan.  Thank you, Mr. Chairman. With regard to the 
general question, it's an especially important question now, 
because, as I noted in my testimony, we have developed a new 
model BIT and there's an interagency process that's ongoing, 
again, with close consultation with this committee and 
congressional staffs on possible future BIT partners, who we 
would be considering.
    So, some of the factors that are important in that 
process--in that decision making process--include the depth of 
the economic relationship, the commitment to reform that the 
country that we would look at a possible BIT partner has, the 
way in which U.S. investors have been treated in the country, 
and key sectors in the country that we are considering, that 
may be of interest, and more broader foreign policy 
considerations.
    One point that I want to emphasize is this idea of our BIT 
not only as providing protection for U.S. investors, but also 
as a vehicle to help drive economic reform programs. I think 
that's very important. And so, the extent to which a partner 
country is interested in a BIT is obviously a very important 
issue that goes into the consideration of possible future BIT 
partners.
    With regard to your specific question, with regard to 
Uruguay, a lot of those considerations that I mentioned, came 
into play. As I mentioned earlier, a goal of the administration 
has been to increase trade and investment throughout the region 
and a Bilateral Investment Treaty is an important tool in that 
regard. And we saw Uruguay as a very good candidate for a 
number of the reasons again, that I have touched on. One of 
which is, they were very interested in 2004, approaching the 
administration with their interest in a Bilateral Investment 
Treaty. Also, there is--as you mentioned--a significant amount 
of economic reform being undertaken by the government, and we 
thought that a BIT would enable that process to gain some 
ground and to help in that regard. But also, more generally, in 
terms of our economic relationship, we understand right now, 
there are no investment disputes that we have involving any 
U.S. investors. They have been a success story in terms of IPR 
recently. They got off the 301 watchlist due to some of their 
activities. Even in terms of areas like corruption, where I 
think they ranked number two on the Transparency International 
List for its very pro-anticorruption policies. So, it's a 
number of these factors and given these factors, we thought it 
was an important move to make now.
    The Chairman. As you know, as countries have been evaluated 
for the Millennium Challenge Account program, the corruption 
factor is one that really is very large among many. But it is 
one that has been difficult for some countries to meet. And by 
the same token, the incentive to do so, has led to many 
countries being interested in the program. But, you have 
testified that this isn't the case for Uruguay. Uruguay ranks 
second in terms of transparency. In other words, quite apart 
from this new treaty, they have made a great deal of progress. 
And I think that's an important point to make.
    I would like to assess what kind of consultation process 
the administration undertook. I'm not certain what you're 
obligated to do under a bilateral investment treaty. You 
indicated that under the free trade agreement, apparently much 
more consultation with many parties, that you have enumerated, 
is required. Who, in the private sector, are really involved in 
the process of consultation? Does the 2004 model on which this 
agreement is based, reflect private sector input? Finally, is 
there private sector support for the treaty that you are 
presenting this afternoon?
    Mr. Sullivan.  Thank you, Mr. Chairman.
    To answer your last question first, there is private sector 
support for this treaty. With regard to the consultations on 
the model BIT, as I believe you know, it took a fair amount of 
time to actually develop and come to agreement on different 
elements of the final model, that was produced in 2004. That 
consultation process--it took some time, because it involved a 
number of different parties. It involved a very robust 
interagency process, where different agencies weighed in on 
their different concerns. It also involved a significant 
consultation with the Congress, and members, and staffs. We 
were also guided in part by the TPA legislation, which had a 
number of provisions that were guiding new trade agreements.
    Additionally, it included private sector involvement and 
civil society, the specific individual private sector entities. 
I do not have that at my fingertips, but I'd be glad to take 
that for a submission----
    The Chairman. And share that for the record.
    Mr. Sullivan.  Yes, sir. We'll make sure we get back to you 
both in terms of that and then, the other NGO group, but the 
consultations were, as I mentioned, quite robust across a broad 
section and I believe that there is a lot of different 
interests involved, but I believe that we have struck a balance 
that has primarily succeeded in gaining support from all these 
groups.
    The Chairman. Has there been some manifestation of that 
support of the individual firms? Have entities endorsed this 
treaty?
    Mr. Sullivan.  Mr. Chairman, again, I'll take that for 
submission. I know that, in general, the private sector support 
for this treaty has been strong. As to specific firms, I will 
take that for submission and get back to you on that.

    [The additional information referred to above follows:]

    Additional Information Submitted in Response to Senator Lugar's 
                                Question

    Mr. Sullivan. The Uruguay bilateral investment treaty is the first 
negotiated on the basis of the 2004 U.S. model text. In developing the 
model, the administration undertook extensive consultations with a wide 
range of private sector groups, as well as the Congress. We received 
input from private sector advisory bodies including the State 
Department's Advisory Committee on International Economic Policy, and 
the Industry Trade Advisory Committees administered by the Office of 
the U.S. Trade Representative and the Department of Commerce. 
Collectively, these groups encompass hundreds of representatives of 
interested constituencies, including business groups, trade unions, and 
other elements of civil society. In addition, several firms and 
organizations provided input in their individual capacities. To 
facilitate these consultations, we posted a draft of the model text on 
the State Department website in early 2004, while its development was 
underway.
    Business associations involved in these consultations included the 
American Council of Life Insurers, the Emergency Committee for American 
Trade, the National Association of Manufacturers, the National Foreign 
Trade Council, the U.S. Coalition of Services Industries, and the U.S. 
Council of International Business. These groups represent a wide 
spectrum of U.S. businesses ranging from consumer products, 
manufacturing, and financial services, to energy sectors.
    Labor, environmental, and other civil society groups involved in 
these consultations included AFL-CIO, the Center for International 
Environmental Law, Earthjustice, Friends of the Earth, Georgetown 
University Environmental Policy Project, Oxfam America, National 
Wildlife Federation, National Resources Defense Council, and the Sierra 
Club.
    All of these groups made important contributions that helped to 
inform our work on the new model investment treaty, which was concluded 
in late 2004.
    With respect to the Uruguay BIT in particular, we briefed private 
sector advisers through the Industry Trade Advisory Committee on the 
negotiations and consulted them on requests by Uruguay to depart from 
the model text.
    Specific groups that have expressed support for the Uruguay BIT 
include the Emergency Committee for American Trade, the National 
Association of Manufacturers, and the U.S. Council for International 
Business.

    The Chairman. For that matter, with trade groups and 
aggregates of firms, has someone spoken favorably about this? I 
presume then, that you have an affirmative answer to this 
question. Do private American investors feel secure in this 
treaty? Do they believe that this treaty offers them the 
protection that they would need in order to have--to use your 
terms--a robust relationship back and forth with Uruguay?
    Mr. Sullivan.  I think the answer to that, Mr. Chairman, is 
yes. The provisions--and I layout the provisions in my written 
statement--the eight core principles that are in this treaty 
that offer protection to private sector individuals. Really the 
essence of the treaty is the protection of investor rights, the 
opportunity to settle disputes, either through the domestic 
courts in Uruguay or through binding international arbitration. 
And that is a key component of this treaty. I might add, that 
with regard to the support that we've seen, one of the reasons 
is because there have been improvements in this treaty versus 
the previous model BIT. Both this treaty and the previous model 
BITs have the eight core protections, core principles that I 
mentioned in my opening statement, and we can discuss those if 
you have any questions on the particulars. But, where we think 
there's been improvement, is in the areas that have been of 
concern to investors, such as transparency. There are a number 
of provisions that make the process more transparent. And also 
in terms of the arbitration process itself, it clarifies some 
of the rules. It offers the opportunity to get rid of frivolous 
claims.
    And so, the improvements that we think that build on this 
treaty from the previous model BIT, have engendered generally 
widespread support. So, we're confident that in a number of 
sectors, the support is very strong.
    The Chairman. Now sometimes, even though we may have the 
best of intentions, there are things that go awry. An 
arbitration process is set up in previous bilateral investment 
treaties, as well as in this one. What has been the experience 
as you've examined the bilateral investment treaties in the 
past? Has the arbitration mechanism worked in ways that were 
beneficial to the United States, and at a minimum, provided 
fairness to our interest?
    Mr. Sullivan.  Yes. In general, the arbitration procedures 
have been followed and again--now sometimes, it's a lengthy 
process, which can be somewhat problematic--but in general, the 
arbitration procedures have been followed and they've also in 
general, been able to get investors the action and the justice 
really, that they have sought.
    And again, I want to go back and emphasize the importance 
of having that option to make a choice between the domestic 
court of the country in which that individual is investing, 
binding international arbitration. And so having that option, 
is something that's the essence of the treaty. But the history 
of the program and our relations and in terms of where we have 
had other BITs, the BITs actually have been quite successful.
    The Chairman. During your negotiation of this treaty, can 
you describe the kinds of investments in which the United 
States is involved? I mentioned in the opening statement that 
there are as many as 80 companies. But, what sort of industries 
are most prominent in this? What are the logical aspects of the 
flow of trade between the United States and Uruguay? What do 
they export to us and what do we export to them? In terms of 
pure financial arrangements, what kind of mechanisms are likely 
to be set up between the two countries that would be 
advantageous?
    Mr. Sullivan.  Thank you, Mr. Chairman. Our exports in 2005 
totaled about $260 million to Uruguay, that was primarily in a 
number of high-tech goods, TV equipment, medical equipment. It 
is important to note that--and again, this is another reason we 
think this is an important treaty, U.S. exports are up--
although from the small number, they're up by about 50--over 50 
percent since 2002. So, we see that oftentimes what the case 
is, is that investment in a foreign country can be a platform 
for additional exports from the United States. And I think in 
this case, there's an opportunity to see that.
    So, we also have investments in the financial area within 
Uruguay. And, although I do not believe that we have any large 
scale investments in any kind of energy sector there, an area 
in which I know you are very focused, a lot of the BITs that we 
have the individual investor is using the BIT as you know in 
the energy sector. Now, what we do have, in terms of the energy 
sector with Uruguay, is that they have been a purchaser also of 
energy equipment.
    The Chairman. Yes.
    Mr. Sullivan.  That's an area of U.S. exports that has the 
potential to grow. Finally, it's not just investments, but one 
important element of the revised model BIT, is that if there 
are large service contracts between a government--the Uruguayan 
government--and an investor. So, those kind of large--so, for 
example say some kind of energy related service contract, that 
kind of contract would actually fall under the provisions of 
the BIT. So, it's fairly robust in terms of the different areas 
in which U.S. companies would be engaged, or could be engaged. 
And again, I think that's another reason why we believe this is 
a strong treaty.
    The Chairman. This is a topical--almost current events 
question, as opposed to a broader problematic or philosophical 
one. In the past three weeks, many of the currencies in Latin 
America have been under stress. That has been true of 
currencies in other parts of the world. This may lead, during 
the latter part of the week, to central banks in six countries 
raising their interest rates very substantially.
    I'm curious whether Uruguay is undergoing such a 
predicament presently. That is, is it experiencing rapid 
declining currency or fears of either inflation or of liquidity 
being terminated? If so, what effect is this likely to have in 
terms of the debate on this treaty in either country?
    Mr. Sullivan.  Mr. Chairman, with regard to the specific 
question, again, I'll--I'd like to take that for the record in 
terms of the specifics of the Uruguayan currency and what the 
situation is going--well, with regard to their financial 
markets.

    [The information referred to above follows:]

    Additional Information Submitted in Response to Senator Lugar's 
                                Question

    Mr. Sullivan. Many emerging-market currencies have depreciated over 
the past month. We have also seen volatility in emerging-market stocks 
and sovereign bonds in recent weeks. These developments are a reminder 
of the risks of investment. The government of Uruguay ratified the BIT 
before the most recent market turbulence; so it did not affect the 
debate in Uruguay.
    I would like to point out that while many emerging-market 
currencies depreciated in recent weeks, the Uruguayan peso has remained 
quite stable. The Uruguayan economy has made a strong recovery since 
the financial crisis of 1999-2002. Most analysts expect real GDP growth 
of close to 5% this year, and annual inflation is running at about 6%. 
While the economy still has some vulnerabilities, the government of 
Uruguay has taken many steps to improve the strength of the financial 
system.
    I should note that although we have been discussing BIT protections 
for foreign direct investment, portfolio investments, such as stocks 
and bonds, are also covered by the BIT. Together with the provision 
guaranteeing unrestricted transfers related to an investment, the BIT 
limits capital controls on covered portfolio investments. Such 
protections make it less likely governments will resort to controls, 
which can serve to exacerbate a crisis, and correspondingly can 
reassure investors, making it less likely they will act precipitously.
    The BIT also addresses sovereign debt restructurings that can 
result from financial crises. If those restructurings are carried out 
under collective action clauses and certain other processes, the 
Uruguay BIT prohibits investors from filing claims, except for cases of 
discrimination. We believe that by supporting collective action clauses 
we help ensure orderly debt restructurings, which benefit investors and 
debtor nations.
    Of course, while a BIT provides significant benefits to investors, 
it cannot create an investment environment that is entirely free of 
exchange-rate risk, default risk, or other risks.

    Mr. Sullivan. But, the broader point that's raised, is an 
important one and it does relate to a provision in the BIT. In 
one of those provisions, is--and I believe, it goes to both 
Uruguayan and U.S. support for the agreement, but one of the 
provisions in the BIT that's been negotiated, which again, does 
not affect the core eight principles, but it is an important 
departure, that's important to highlight. And I did highlight 
it in my written testimony, was with regard solving debt 
restructuring with the Uruguayan's and to the degree to which, 
if that is done per the terms of the instrument, that that--
those kind of activities would not fall within the provisions 
of the BIT, unless there was a claim by an investor that there 
was some kind of discriminatory practice.
    So, unless that claim can stand a broader solving debt 
restructuring, would not be subject to the scope of the BIT and 
I believe that this was a provision that Uruguayan's were 
interested in, because it relates to some of the issues that 
you're talking about, which is to have, in your minds, 
flexibility to address potential financial emergencies and 
other issues with regard to financial crisis and our 
negotiators accepted that as important--as an important point 
for them.
    The Chairman. So, translating this into less technical 
terms, it would mean, that United States investors still need 
to venture into the Uruguayan market, eyes wide open, with an 
idea of the debt structure of that government, and likewise its 
currency, because this treaty creates flexibility, in the event 
that Uruguay needs it to manage its situation. This could lead 
to a reduction in value of the currency or some type of 
restructuring of the debt, that could create some economic 
losses for an American investor or anybody else, including 
Uruguayan investors in this situation.
    So, what you're saying is that the treaty, with respect to 
the Uruguayans in particular, recognizes that this is a 
difficult world, that restructuring and changes sometimes 
occur, and it provides for that flexibility. And so, we 
understand that, eyes wide open, as we enter into this treaty?
    Mr. Sullivan.  That's correct, Mr. Chairman. And that's an 
excellent point. The provisions of the BIT, as I mentioned, 
focus on the eight core principles, but there are some areas in 
which there are some exceptions and they're narrow and we tried 
to make them as narrow as possible in the treaty and it is 
important for investors to be aware of what these are, because 
it could affect their ability to bring actions under the BIT. 
And so, this one, the one that you have raised, particularly 
given this situation, and the condition of some of the other 
developing country economies is an important one to note.
    The Chairman. Correspondingly, I think from the standpoint 
of Uruguay, it ought to be pointed out that investors in our 
U.S. Treasury bonds, of which there are many coming from all 
over the world presently, accept the fact that the dollar may 
go up or down. That's the value of what they hold. But, that is 
taken for granted in the United States, in a very transparent 
set of markets everyday with futures markets and indicators of 
which way the winds may be blowing.
    Mr. Sullivan.  Yes, sir.
    The Chairman. It is a world of risk when it comes to 
current financial transactions involving currency quite apart 
from investments in real material--real estate.
    Well, I thank you very much for your testimony and your 
forthcoming responses. Do you have any other comments that you 
want to make for the benefit of the record before we conclude 
our hearing?
    Mr. Sullivan. I would like to make one comment and again, 
Mr. Chairman, it goes to some of the current events that are 
occurring in the region. You see what is a slightly troubling--
not slightly--a troubling trend within the region with regard 
to expropriation and nationalization with certain countries. 
This kind of BIT, this kind of investment treaty is designed 
exactly to address these kinds of situations and therefore, 
although those kind of circumstances do not exist between the 
United States and Uruguay, it is important to recognize the 
broader intent of the Bilateral Investment Treaties and the 
importance both in terms of protecting investor rights, but 
also in terms of ensuring that when there are problems that we 
are seeing in other countries, that having a protection of this 
kind of treaty, is extremely valuable to both--primarily to the 
American investors, but also to the economies of the countries 
in which they're investing.
    So, I would just like to conclude on that point, sir.
    The Chairman. Well, it was an excellent point on which to 
conclude. I think we are all delighted to note the very fine 
visit by the distinguished President of Chile with our 
President last week and the reaffirmation of the strength of 
that relationship, which has been based upon the principles we 
have discussed today, and maybe even some beyond, and offers a 
source of influence in highlighting in South America at this 
point that the Uruguayan friendship certainly is another one in 
which we celebrate. We are hopeful we may be able to take 
action upon this treaty promptly.
    I would ask that the record be kept open for the rest of 
today for other questions or testimony by members who were 
unable to attend and likewise, that as rapidly as possible you 
submit for the record the responses to questions that we have 
raised today and that you indicated your willingness to respond 
to.
    Mr. Sullivan.  Yes, sir.
    The Chairman. Having said that, we appreciate your coming 
and the hearing is adjourned.
    Mr. Sullivan.  Thank you.

    [Whereupon at 3:37 p.m., the hearing was adjourned.]

                              ----------                              


Responses to Additional Questions Submitted for the Record to Assistant 
         Secretary Daniel Sullivan by Members of the Committee

Responses to Questions Submitted by Chairman Lugar
    Question. Article 24.1 of the U.S.-Uruguay BIT, Investor-State 
arbitration, with respect to breaches of ``investment agreements'' with 
a national authority is available ``only if the subject matter of the 
claim and the claimed damages directly relate to the covered investment 
that was established or acquired, or sought to be established or 
acquired, in reliance on the relevant investment agreement.'' This 
provision diverges from the Model BIT. How will this affect the ability 
of investors to resolve disputes with national authorities?

    Answer. The quoted language from Article 24.1 is the same as that 
found in the model BIT, and therefore does not represent a departure. 
The same language can also be found in our recent free trade agreement 
texts. This provision clarifies that for claims for breach of an 
investment agreement, the claimant must allege that both the subject 
matter of the claim and the alleged damages ``directly relate'' to the 
covered investment made in reliance on the relevant investment 
agreement. In other words, a claim for breach of an investment 
agreement can be made if the subject matter and damages relate to a 
covered investment (for example, a claim that failure to perform 
affected, and caused damages to, a covered investment, which depended 
on such performance), but not if they relate to aspects of the 
investment agreement that do not have a significant connection to the 
covered investment (for example, a claim for contract damages stemming 
from simple failure to perform pursuant to a specific term that was not 
a significant basis for the establishment or acquisition of the covered 
investment).


    Question. There have been criticisms from the U.S. business 
community, who BITs are intended to protect, that the model and new 
direction of BIT negotiations are trending towards ``defensive 
concerns'' at the expense of the U.S. community investing overseas. Can 
you address this criticism, and if you find it to be inaccurate, please 
explain why.

    Answer. We believe that the model BIT and the Uruguay BIT reflect 
long-standing U.S. policy of concluding investment treaties that 
provide meaningful, high-standard protections to U.S. investors. The 
Uruguay BIT adheres closely to the text of the model BIT, which was 
developed in close consultation with Congress, the business community, 
and other stakeholders. The model BIT includes strong provisions on the 
free transferability of funds, standards for expropriation and 
compensation consistent with U.S. legal principles and practice, 
national treatment and most favored nation treatment, limits on trade-
distorting performance requirements, investor-state arbitration and 
other core protections. The model also contains clarifications of key 
substantive provisions, such as expropriation and the minimum standard 
of treatment, and new procedures to eliminate frivolous claims and make 
the arbitration process more efficient and transparent. In developing 
the model, we took account of our experience in defending claims 
against the United States under the investment chapter of the North 
American Free Trade Agreement. In addition, we took into account the 
negotiating objectives on investment contained in the Trade Promotion 
Authority Act of 2002, as our objective is to maintain consistency 
between our BITs and our free trade agreement investment chapters.


    Question. Can you explain the relationship between the investment 
chapters of free trade agreements and BITs generally? How about 
specifically in terms of dispute resolution procedures? Will investors 
be able to determine without difficulty which dispute settlement 
procedures are available to them at any given point in time of their 
investment?

    Answer. U.S. free trade agreements (FTAs) with investment chapters 
contain the same basic protections as U.S. bilateral investment 
treaties (BITs), and many of their core provisions use identical or 
nearly identical language. When we negotiate an FTA with a country with 
which we have a pre-existing BIT, we consider whether it is desirable 
to include an investment chapter to update our investment commitments 
to more closely reflect our present standards. We consider factors such 
as the level of investor protection afforded by the pre-existing BIT 
and the likelihood of successfully negotiating higher standards in a 
new FTA. We did not include an investment chapter in our FTA with 
Bahrain, with which we have a BIT, but we did include one in our FTA 
with Morocco, also a BIT partner, and in the Central American-Dominican 
Republic Free Trade Agreement, where we have a BIT in force with 
Honduras.
    If there is a pre-existing BIT, and a new FTA that includes an 
investment chapter is negotiated, our practice has been to make the FTA 
effectively supersede the BIT. This is accomplished by the two Parties 
mutually agreeing to suspend dispute settlement under the BIT. A key 
exception to this suspension, however, is that BIT dispute settlement 
provisions continue to apply, for a period of 10 years, to covered 
investments and those BIT disputes that existed prior to the entry into 
force of the FTA. This exception ensures that investors who invested 
prior to the FTA continue to have access to dispute settlement under 
the BIT for 10 years after entry into force of the FTA. These investors 
have the choice of access to dispute settlement either under the BIT or 
the FTA during the 10-year period. Disputes arising after entry into 
force of the FTA involving investment made after the entry into force 
of the FTA may only be brought under the FTA. After the 10-year period, 
no dispute that arose before entry into force of the FTA may be taken 
to arbitration under the BIT or the FTA, and all disputes that arise 
after the 10-year period may only be brought under the FTA. These rules 
are described in the text of the Morocco FTA (Article 1.2(3)-(5)), and 
in an August 5, 2004 exchange of letters with Honduras, respectively. 
Both texts are available on the website of the Office of the U.S. Trade 
Representative.


    Question. Article 5 of the 2004 Model revises the provisions for 
minimum standard of treatment. One of the specific criticisms of this 
alteration is that there is not a clear definition in international law 
for minimum standard treatment of aliens. Can you explain the thought 
process behind the revision of this provision and include your 
understanding of minimum standard of treatment of aliens?

    Answer. In developing the 2004 model BIT, we sought to clarify that 
the obligation set forth in Article 5 prescribes the customary 
international law minimum standard of treatment of aliens as the 
minimum standard of treatment to be afforded to covered investments. In 
addition, Article 5 contains greater detail than prior models 
concerning ``fair and equitable treatment'' and ``full protection and 
security,'' and provides that these concepts do not expand the Parties' 
obligations beyond those required under the customary international law 
minimum standard of treatment of aliens. These clarifications in part 
reflect our experience with international arbitration under Chapter 11 
of the North American Free Trade Agreement (NAFTA). These 
clarifications also track the July 2001 interpretation of the NAFTA 
Free Trade Commission, which is comprised of the three government 
Parties to the NAFTA, regarding a similar Minimum Standard of Treatment 
article in the NAFTA. Customary international law, by definition, may 
evolve over time. Any attempt to provide more specificity on the 
customary international law minimum standard of treatment of aliens in 
the BIT text could risk denying investors the benefits of the 
protections provided by customary international law, as it may continue 
to evolve.


    Question. Does Article 30, Governing Law, in effect, give the 
respondent state the ability to turn an investor-State case into a 
State-State case? If not, please explain why not.

    Answer. Articles 30.1 and 30.2 specify the law a tribunal must 
apply to investor-State disputes. If the two government Parties seek to 
address an interpretive issue regarding a provision of the Treaty, they 
may do so in accordance with Article 30.3, which ensures that arbitral 
tribunals respect the intent of the two Parties that entered into the 
Treaty. It allows the Parties to issue a joint decision, binding on 
tribunals, expressing the Parties' interpretation of a provision of the 
BIT. By exercising this right, Parties to the BIT may, by their 
agreement, affect the way in which the treaty is interpreted by an 
investor-State tribunal. However, this does not change the nature of 
the dispute from one between an investor and a Party to the BIT. The 
fact that the Parties to the BIT do not issue a joint interpretation in 
a particular circumstance does not necessarily imply any disagreement 
with respect to the interpretation of the treaty that would suggest the 
possibility of a State-State dispute. It may simply reflect that the 
Parties see no need to clarify their interpretation of the text.

                               __________

Responses to Questions Submitted by Ranking Member Biden
    Question. You stated in your testimony that ``by 2004, the United 
States had overtaken Mercosur as Uruguay's number one trading 
partner.'' According to the CIA publication ``The World Factbook'' 
(2005), in 2003 the United States was the third largest exporter to 
Uruguay, and the second largest market for products from Uruguay. What 
caused the significant expansion of trade between the United States and 
Uruguay in 2004? In what sectors, in particular, did this expansion 
occur?

    Answer. In 2004, the United States became Uruguay's largest export 
market, followed by Brazil and Argentina. In 2005, Uruguayan exports to 
the United States grew further and almost reached total sales to 
Mercosur (the Southern Cone Common Market, consisting of Argentina, 
Brazil, Uruguay, and Paraguay, to which Venezuela has just been 
admitted as a full member). In 2005, Uruguay sold $760 million to the 
United States (22.4 percent of total exports), $781 million to Mercosur 
(22.9 percent) and $587 million to the EU (17 percent).
    The surge in sales in recent years was led by rising exports of 
beef--Uruguay's traditional export--and gasoline. Although Uruguay is a 
net importer of crude oil, it has excess refining capacity and is a net 
exporter of gasoline. U.S. imports of petroleum products from Uruguay 
increased from none in 2003 to $97.5 million in 2005. Beef sales rose 
significantly beginning in 2003, when the United States reopened its 
beef market after Uruguay contained an outbreak of foot-and-mouth 
disease. In 2005, beef sales accounted for 60 percent of total exports 
to the United States, and gasoline sales 17 percent. U.S. exports to 
Uruguay--which consist mainly of high-tech goods like computers, radio/
TV equipment, telecommunications equipment, and medical equipment--
dropped significantly in 1998-2002 following a steep economic crisis, 
and resumed growth in 2003. U.S. exports rose 60 percent in 2003-2005.


    Question. Are there any outstanding commercial disputes or 
expropriations claims involving the government of Uruguay (or an agency 
of that government) and U.S. firms? If so, please provide summary 
information about each dispute or claim, and the current status 
thereof.

    Answer. We are not aware of any outstanding commercial disputes or 
expropriation claims between U.S. persons and the government of Uruguay 
or its agencies.


    Question. Please provide a general summary of the investment 
climate in Uruguay for foreign direct investment, as well as a summary 
of the investment climate in Uruguay for U.S. firms.

    Answer. The Government of Uruguay acknowledges the important role 
that foreign investment plays in economic development and works to 
maintain an open investment regime. Uruguay's 1998 Investment Law (no. 
16906) declares that the promotion and protection of national and 
foreign investment is in the national interest. The law provides for 
national treatment, supports the establishment of foreign investment in 
country, and provides for the repatriation of capital and profits from 
investments. The law provides for 100 percent foreign ownership of 
investments, except where restricted for national security purposes. 
Uruguay maintains few restrictions on foreign investment and generally 
does not require that firms receive specific authorizations to invest.
    Uruguay has a history of state monopolies in a number of areas, 
such as telecommunications and energy. However, in the past two decades 
the government has undertaken a privatization process to increase 
private sector participation in these areas. In the telecommunications 
sector, Uruguay maintains a monopoly on basic telephone services but 
has opened wireless services to private competition. The energy 
generation, petroleum, transportation, sanitation and financial 
services industries are all characterized by varying degrees of 
government involvement or monopolization, but are increasingly open to 
private investment.
    U.S. firms have generally encountered few major obstacles to 
investing in Uruguay, but have noted difficulties with bureaucratic 
procedures and tenders, and with numerous changes in tax codes and 
regulations since 2001. The World Bank's ``Doing Business'' report, 
which ranks countries according to the quality of their investment 
climates, ranks Uruguay 85th globally and 9th regionally of 155 
countries surveyed. The annual report of the U.S. Embassy in Montevideo 
concerning Uruguay's investment climate is available on the website of 
the U.S. State Department (http://www.state.gov/e/eb/ifd/2006/
62048.htm).


    Question. How does this treaty assist U.S. firms protect their 
intellectual property rights in Uruguay?

    Answer. BITs comprise one element of our efforts to protect U.S. 
intellectual property rights abroad. Consistent with long-standing U.S. 
BIT practice, the treaty's definition of ``investment'' lists 
``intellectual property rights'' as one of the forms that an investment 
may take. Thus, where an investor owns or controls an intellectual 
property right that is, or is part of, a covered investment, it is 
subject to BIT protections.


    Question. The definition of ``covered investment'' in the 2004 
model BIT, and in this treaty, provides that it applies to investments 
``in existence as of the date of entry into force of this Treaty or 
established, acquired, or expanded thereafter.'' This language is not 
contained in the 1994 model BIT. Is there a material difference between 
the language contained in this definition from the 1994 model and the 
2004 model BIT?

    Answer. The 1994 model BIT defines ``covered investment'' in 
Article I as ``an investment of a national or company of a Party in the 
territory of the other Party.'' Article XVI, paragraph one, of the 1994 
model provides that the BIT ``shall apply to covered investments 
existing at the time of entry into force as well as to those 
established or acquired thereafter.'' The 2004 model BIT consolidates 
both concepts in the definition of ``covered investment,'' which in 
substance is not a change from the 1994 model.


    Question. Article 1 defines ``investment'' as an asset that ``has 
the characteristics of an investment.'' What does that phrase mean? Is 
that not a tautology? Please provide examples of an asset owned by an 
investor that would not satisfy this requirement.

    Answer. The forms that investment may take evolve over time, in 
response to changed economic and legal circumstances. For this reason, 
and consistent with long-standing U.S. BIT practice, the definition of 
``investment'' is intentionally broad. The definition does, however, 
provide guidance on what constitutes an investment, notably by 
identifying certain ``characteristics'' of an investment, and setting 
out an illustrative list of forms that an investment may take. 
Additional elaboration is provided in several footnotes to the 
definition. Among other things, these footnotes set forth the types of 
debt that are less likely to have the characteristics of an investment; 
state that investments do not include claims to payment that are 
immediately due and result from the sale of goods or services, or 
orders or judgments entered in judicial or administrative actions; and 
provide that licenses, authorizations, permits, and similar instruments 
do not have the characteristics of an investment if they do not create 
any rights protected under domestic law. In general the definition 
provides more elaboration on the concept of ``investment'' than the 
prior 1994 model. At the same time, the definition is broad enough to 
encompass the evolving nature of investment throughout the life of the 
treaty.


    Question. Article 21 contains several departures from the model 
BIT. Please explain the rationale for these departures, and the 
benefits to the United States that result.

    Answer. Article 21 addresses the coverage of the BIT with respect 
to taxation measures. The principal departure from the U.S. model in 
this article is found in paragraph 2, and it is an area where the 
Uruguay treaty provides a higher level of investor protection than the 
model. This paragraph provides that the national treatment and most-
favored-nation treatment obligations shall apply to all taxation 
measures, other than those relating to direct taxes (such as taxes on 
income, capital gains, and inheritances), and subject to other 
limitations. In other words, the Uruguay BIT provides protection 
against indirect taxation measures (such as excise or value-added 
taxes) that discriminate based upon nationality. We have included this 
provision in recent U.S. free trade agreements containing investment 
chapters and in the North American Free Trade Agreement, and we 
consider on a case-by-case basis whether to include it in individual 
BIT negotiations. In making the decision we consider factors such as 
U.S. investor interest in the protection and whether comparable 
provisions are contained in a tax convention between the United States 
and the other country. We do not presently have a tax convention with 
Uruguay.
    Paragraphs 5 and 6 of Article 21 clarify the application of dispute 
settlement provisions to taxation measures alleged to be a breach of 
treaty obligations or an investment authorization or investment 
agreement. This is not a substantive change from the model, as the same 
substantive effect is achieved through paragraph 1 of Article 21 in the 
model. Our model BIT was not completed until after the Uruguay text was 
tabled and these paragraphs are intended to be consistent with our 
approach to this issue in the model.


    Question. Annex F is a significant departure from the model BIT. 
Please explain the rationale for this departure, and the benefits to 
the United States that result.

    Answer. A leading priority of Uruguay in the BIT negotiation was to 
ensure the government's ability to regulate financial services and 
financial institutions in appropriate ways consistent with the treaty. 
This is reflected in Annex F, which contains additional provisions on 
financial services.
    The first two paragraphs of the annex clarify the shared 
understanding of the Parties concerning the relative standards of 
treatment to be compared in analyzing national treatment and most-
favored-nation treatment with respect to financial institutions. 
Similar language is found in the financial services chapters of recent 
U.S. free trade agreements (FTAs) and the North American Free Trade 
Agreement (NAFTA). This language is intended to help ensure proper 
application of these obligations in the financial services sector. The 
United States agreed to this language because Uruguay requested it and 
it was consistent with our interpretation of the provisions in the text 
that it is intended to clarify.
    Both the United States and Uruguay believed that State-State 
arbitration, rather than investor-State arbitration, should be the sole 
means of dispute settlement for claims relating to the treaty's 
national treatment or most-favored-nation treatment obligations for 
measures relating to financial institutions. This rule is reflected in 
paragraph 4 of the Annex. Language to the same effect is found in 
recent U.S. FTAs with investment and financial services chapters, as 
well as the NAFTA. This rule can help to prevent inappropriate claims 
of discrimination based on nationality in response to regulation in the 
financial sector, by vesting the decision of whether to submit a 
dispute in the hands of the investor's home country. The United States 
determines on a case-by-case basis whether such a provision should be 
tabled in individual BIT negotiations. In making this judgment we 
consider factors such as the U.S. investor interest, the nature of the 
other country's financial regulatory regime, the preference of our 
negotiating partner, the concerns of U.S. financial regulators, and 
whether investor-State arbitration is needed to protect the rights of 
U.S. investors in financial institutions of the other country. Even 
where the United States proposes this exclusion from investor-State 
arbitration for claims relating to U.S. measures in this sector, we 
allow for the possibility that our negotiating partner might choose to 
have investor-State arbitration apply to such claims for measures 
relating to its own financial institutions.
    Finally, paragraph 5 of the annex clarifies that the treaty does 
not prevent a Party from taking measures relating to financial 
institutions that are necessary to secure compliance with laws or 
regulations that are not inconsistent with the Treaty, such as measures 
relating to the prevention of deceptive and fraudulent practices. This 
language, which was proposed by Uruguay, is also found in the financial 
services chapters of recent U.S. FTAs and is consistent with our 
interpretation of the relevant provisions in the text.

