Over at Opinio Juris, Susan Franck talks about empiricism and international law, with a focus on investment treaty decisions, noting the differences between the rhetoric and the reality of investment treaty decisions. David Zaring offers some comments.
From the previously mentioned Norwegian draft model BIT (MS Word document) that reader Perry Bechky pointed me to:
ARTICLE [6]: EXPROPRIATION
1. A Party shall not expropriate or nationalise an investment of an investor of the other Party except in the public interest and subject to the conditions provided for by law and by the general principles of international law.
...
What's noticeably absent is the "measures equivalent to expropriation or nationalization" or "measures tantamount to nationalization or expropriation" language.
I'm not sure how much detail we will get during the campaign about the specifics of trade agreement rules, but I wonder if this meets the goal of Senator Obama, mentioned here, that "... With regards to provisions in several FTAs that give foreign investors the right to sue governments directly in foreign tribunals, I will ensure that foreign investor rights are strictly limited and will fully exempt any law or regulation written to protect public safety or promote the public interest."
From a Norwegian draft model BIT (MS Word document) that reader Perry Bechky pointed me to:
Article 3: NATIONAL TREATMENT
1. Each Party shall accord to investors of the other Party and to their investments, treatment no less favourable than the treatment it accords in like circumstances[FN2] to its own investors and their investments, in relation to the establishment, acquisition, expansion, management, conduct, operation and disposal of investments.
[FN2] The Parties agree/ are of the understanding that a measure applied by a government in pursuance of legitimate policy objectives of public interest such as the protection of public health, safety and the environment, although having a different effect on an investment or investor of another Party, is not inconsistent with national treatment ... when justified by showing that it bears a reasonable relationship to rational policies not motivated by preference of domestic over foreign owned investment.
Here are a few initial thoughts on this provision.
First, my sense is that perhaps the footnote would only apply to situations involving de facto discrimination. De jure discrimination (i.e., explicit distinctions between foreign and domestic investors/investments) would be governed by the main text alone. But I'm not absolutely sure about this.
Second, the substance of the footnote indicates that disparate impact/discriminatory effect on foreign investment/investors will not lead to a violation of national treatment rules in all instances. Specifically, there will be no violation if the following conditions are met: (1) The measure pursues "legitimate policy objectives of public interest"; (2) the measure "bears a reasonable relationship to rational policies"; and (3) the "policies" at issue are "not motivated by preference of domestic over foreign owned investment." The first two elements seem to overlap; I'm not sure exactly how they relate to one another. The last element, the "motivation" behind the measure, involves intent. However, it's not clear what kind of intent the drafters had in mind, subjective or objective.
Third, what happens if there is no discriminatory effect on foreign investors/investments as a whole? Does that mean there cannot be a violation? There are WTO cases that have found a violation where one individual foreign product is treated unfavorably even though there is no overall discriminatory effect against foreign products. I wonder how the quoted provision would deal with the equivalent situation in the investment context. The reference to "an investment or investor" makes me think the "individual" test might be applied.
Fourth, it sounds like the burden is on the defending party to show that the measure "bears a reasonable relationship to rational policies not motivated by preference of domestic over foreign owned investment." So, the complainant first makes its claim of less favorable treatment, but the defending party can then respond with a defense of this kind.
Finally, I thought it was interesting that they put the footnote after "like circumstances." There is some disagreement over which part of the national treatment provision is the key, with some emphasizing the "less favorable treatment" part and others focusing on the "like"-ness part. By putting the footnote where they did, it seems that perhaps these drafters thought "like"-ness was the key.
Here are some statements from the Democratic candidates on investment rules in trade agreements, from responses to questions from the Pennsylvania Fair Trade Coalition (answers are in italics).
9. 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?
... I firmly believe that foreign investors should have no greater rights than Americans in our trade agreements.
10. Will you commit to renegotiate CAFTA and the other FTAs now in effect to eliminate their investor rules that allow private enforcement by foreign investors of the FTA 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?
... With regards to provisions in several FTAs that give foreign investors the right to sue governments directly in foreign tribunals, I will ensure that foreign investor rights are strictly limited and will fully exempt any law or regulation written to protect public safety or promote the public interest. And I will never agree to granting foreign investors any rights in the U.S. greater than those of Americans. Our judicial system is strong and gives everyone conducting business in the United States recourse in our courts. The tribunal system was created to ensure that our investors would have access to similar protection abroad. I understand the concerns surrounding this issue, and am committed to working to address them.
9. 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?
... 2. Changing NAFTA’s investment provisions that grant special rights to foreign companies. Under NAFTA, foreign companies can challenge American laws before special tribunals and outside of our court system. The laws that foreign companies can challenge include regulations intended to protect workers and protect the environment. I believe that trade agreements must elevate standards of living around the world, not empower corporations to hold them down.
10. Will you commit to renegotiate CAFTA and the other FTAs now in effect to eliminate their investor rules that allow private enforcement by foreign investors of the FTA 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?
... As President, I will observe a trade timeout until my administration has reviewed all existing trade agreements to fully determine how they have affected our economy. I do not believe that our trade agreements should give private investors any ability to circumvent U.S. laws, particularly with respect to regulations intended to protect workers and protect the environment. As part of my plan to fix NAFTA, I have called for revising the provisions that permit foreign companies to challenge U.S. laws before special panels rather than in courts. I believe that trade agreements must elevate standards of living around the world and not empower corporations to hold those standards down.
I've been intrigued with the brief mentions of investor-state arbitration during the Presidential campaign. Here is something on this subject from Thea Lee, policy director for the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO):
The NAFTA investment chapter should also be revisited. NAFTA was the first trade agreement that allowed corporations to sue governments and challenge statutes protecting the environment, public health, and consumers. Legislators and ordinary citizens have no effective voice in the dispute resolution process. We would argue for eliminating the investor-state dispute settlement provision and more carefully defining both “investment” and “expropriation.”
I wonder if this could become important in the general election. McCain seems to support trade agreements as currently written, but the Democrats have been quite critical. So which candidate, Clinton or Obama, is more likely to follow the AFL-CIO view? Based on this AP article, it could be either, although Clinton may be (slightly) more closely tied to the AFL-CIO:
The AFL-CIO has not endorsed either Clinton or Obama in the Democratic presidential primary, although it has allowed its 56 member unions to make individual endorsements. Clinton so far has been endorsed by more AFL-CIO unions than Obama.
Clinton has made explicit criticisms of investor-state dispute provisions (see the first link above); I haven't seen anything from Obama, though.
From Alan Beattie in the FT:
Amid the noisy battering the North American Free Trade Agreement is taking from both Democratic presidential hopefuls, one recent statement from Hillary Clinton was particularly resonant. “We will have a very clear view of how we’re going to review Nafta,” the New York senator said. “We’re going to take out the ability of foreign companies to sue us because of what we do to protect our workers.”
...
.. as Mrs Clinton suggested, even the White House and Congress were surprised and disturbed when the US ended up being on the end of several high-profile claims under Nafta. With companies from emerging markets like India and China investing abroad, the rich countries could find themselves increasingly targeted by litigation.
Nonetheless, the system of international investment arbitration continues to expand its reach. European and American business lobbies, often dominated by service sector companies like telecommunications, retailers and banks that invest abroad, are keen on new investment treaties and on adding investment rules to broader trade deals.
The US is pursuing BITs with the “Brics” (Brazil, Russia, India and China) group of emerging market countries. A US trade official says that Washington’s model for BITs deals with some of the problems encountered under Nafta by including rules against frivolous claims, along with consolidation procedures allowing multiple claims to be considered simultaneously rather than clog up the system. But the official adds: “It is inconceivable to think that we would sign a [BIT] without provisions for investor-state litigation.”
That aspect may prove a sticking point for some. Brazil, Latin America’s largest recipient of foreign direct investment, has traditionally been suspicious about investment treaties. A senior Brazilian foreign ministry official said recently that the Argentine example was “very politically visible” and that it would be enormously difficult to get investor-state arbitration through the country’s congress.
One Washington trade lawyer says: “The US business community clearly still likes BITs. But why Brazil or any other country would agree to sign one after looking at Argentina defeats me.”
I've always been surprised at how little public debate there has been on investor-state arbitration. Perhaps part of the reason is that the issues are somewhat complex and difficult to explain. I noticed Hillary Clinton's reference to the issue at the time, and I wonder whether this issue will emerge as an important one in the Presidential race, or just get buried in the larger trade debate, as seems to be the case now.
I was just watching the Obama-Clinton debate in Ohio. Most of the trade stuff was boilerplate, but one point jumped out at me. Both Obama and Clinton stated explicitly that they will "opt out" of NAFTA unless the governments of Canada and Mexico agree to re-negotiate the agreement. In particular, they want labor and environmental standards to be a core part of the agreement, enforceable through dispute settlement. (Senator Clinton also mentioned something about preventing foreign investors from challenging our laws designed to protect workers, but I forget whether that was said in the same context).
Here's my question for any Canadian or Mexican readers (or any others who might have some insights): What would the reaction of the Canadian and Mexican governments be to this proposal?
UPDATE: Here's the part where Clinton talks about foreign investors:
But let's talk about what we're going to do. It is not enough just to criticize NAFTA, which I have, and for some years now. I have put forward a very specific plan about what I would do, and it does include telling Canada and Mexico that we will opt out unless we renegotiate the core labor and environmental standards -- not side agreements, but core agreements; that we will enhance the enforcement mechanism; and that we will have a very clear view of how we're going to review NAFTA going forward to make sure it works, and we're going to take out the ability of foreign companies to sue us because of what we do to protect our workers. (emphasis added)
So I think it's clear that modifying the investment provisions is part of her general re-negotiation plan. What's not clear to me is whether the investment re-negotiation will be limited to laws "to protect our workers." That's the only part she mentions, but it seems strange to single that area out.
Aren't investment protection rules designed to protect investments by Western companies in developing countries? That may have been the original idea, but now the situation seems more complicated:
With Indian firms investing aggressively in the US, India has put on fast track negotiations on signing an investment protection agreement with the [United] States.
While both the US and India have signed the investment protection agreements with a number of countries, the one between them has to be unique because it is a different type of relationship, commerce and industry minister Kamal Nath said.
The two countries would try and conclude the investment protection agreement by the end of this year, he said, adding that Indian investments were not made in the American stock market but in the backyard of the US Economy.
Here's more:
In a measure of the growing US-India trade engagement, Nath spoke about the investment protection agreement between the two countries. "The investment protection agreement between US and India, it turns out, is going to be more for India than US," Nath said in a lighter vein. "It is a different kind of agreement compared to the other countries because investments on both sides are so substantial. We hope to conclude it by end of the year."
He said even 10 years ago not many could have imagined that Indian companies would be investing in the US. At best, he said, one could think in terms of investments in Dubai, Singapore, Sri Lanka or Bangladesh.
Indian companies with a strong US presence being showcased during the two days include Bharat Forge, Essar Group, HCL America, ITC Kitchens of India, Jet Airways, Mahindra USA, Ranbaxy, Tata Group, Thermax and Wockhardt USA.
Together these companies are in industries as diverse as steel, airlines, pharmaceuticals, auto parts, healthcare, hotels, chemicals and information technology. According to one study Indian companies have created 30,000 new jobs in the US.
A law firm representing some gambling interests thinks it might be:
protections contained in the US IIAs, comprising 40 Bilateral Investment Treaties (BITs) and 11 Free Trade Agreements (FTA’s), may be relied upon by foreign investors seeking to establish a gaming business in the US under the “commercial presence” route.
...
in the event the US denies an investor permission to establish a gaming business, this may well amount to a breach of its treaty obligations. The putative investor could then choose to enforce its rights by recourse to the dispute resolution mechanism contained in the applicable IIA.
See pages 8-9 of the document.
(HT to Investment Treaty News)
Reader Perry Bechky points me to a NAFTA Chapter 11 ruling from a couple days ago, in which the Tribunal rejected an investment claim related to trade restrictions on certain live cattle coming from Canada into the U.S. The basic finding was that the Canadians had no investment in the U.S., so the Tribunal did not have jurisdiction.
(I'm going to leave it to the investment folks around here to say more about the decision, if they want to.)
In what is being reported as the first investment claim under CAFTA Chapter 10 (the claimant's press release says it is "believed to be the first notice of intent" under this provision), Pittsburgh-based Railroad Development Corporation (RDC) filed a claim alleging that actions by the Government of Guatemala have amounted to an indirect expropriation of assets and direct interference with contractual rights. RDC's version of the facts is as follows:
In August of 2006, following the effective date of CAFTA, the Government of Guatemala issued a Presidential Decree declaring the privatization of the national railway rolling stock "lesivo," or against the interests of the State. Since then, Ferrovias Guatemala has suffered increased losses due to inability to obtain credit; reluctance of freight transportation customers to do business with a private entity under attack by the Government of Guatemala; and inability to generate lease revenue from railway-related businesses such as lease of station facilities in urban areas and the railway's right-of-way between urban centers for businesses such as electricity distribution. RDC President Robert A. Pietrandrea commented, "As the first example of the restoration of a completely abandoned national railway by the private sector, the usufruct agreement was structured in such a way as to use revenue from businesses such as leases in order to fund the basic railway infrastructure. The Government of Guatemala's failure to treat Ferrovias Guatemala and its investors fairly as required under CAFTA has so undermined our ability to operate and meet our investment objectives that it constitutes an indirect expropriation of the company's assets and right to earn revenue."
I first read about the case in the IISD's Investment Treaty News email. I don't see the latest newsletter on the IISD site yet, but the RDC news release, where the information above comes from, is here: http://www.sys-con.com/read/348643.htm
This could be the first of many!
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