September 30, 2009

ANNEX A: MEMBERS OF THE SUBCOMMITTEE
ANNEX B: PARTICULAR VIEWPOINTS OF SUBCOMMITTEE MEMBERS

ANNEX A: MEMBERS OF THE SUBCOMMITTEE

Anderson, Sarah
Fellow, Institute for Policy Studies

Andros, Linda
Legislative Counsel, United Steelworkers

Canner, Stephen
Vice President of Investment and Financial Services, U.S. Council for International Business

Caron, David
Professor, UC Berkeley Law

Donnelly, Shaun
Senior Director for International Business Policy, National Association of Manufacturers

Drake, Elizabeth
Associate, Stewart and Stewart

Dunn, Alan
Partner, Stewart and Stewart

Eizenstat, Jay
Of Counsel, Miller & Chevalier

Gallagher, Kevin
Associate Professor of International Relations, Boston University

Haworth McCandless, Jennifer
Partner, Sidley Austin LLP

Heather, Sean
Executive Director - International Division, U.S. Chamber of Commerce

Hennike, Toni
Coordinator - International Investments & Arbitration Law Department, Exxon Mobil

Herrnstadt, Owen
Director of Trade and Globalization, International Association of Machinists and Aerospace Workers

Kantor, Mark
Washington, D.C.

Lane, Laura
Senior Vice President of International Government Affairs, Citigroup

Larson, Alan (Co-Chair)
Senior International Policy Advisor, Covington & Burling, LLP

Lee, Thea (Co-Chair)
Policy Director, AFL-CIO

Marshall, Dana
Senior advisor, Dewey & LeBoeuf

Menghetti, Linda
Vice President, Emergency Committee for American Trade

Messing, Joel
Consultant

Miller, Scott
Director of Global Trade Policy, Procter & Gamble

Orellana Cruz, Marcos
Senior Attorney, Center for International Environmental Law

Porterfield, Matthew
Senior Fellow and Adjunct Professor, Harrison Institute for Public Law - Georgetown Law

Posner, Theodore
Partner, Crowell & Moring

Preiss, Jeremy
Chief International Trade Counsel, United Technologies Corporation

Reinsch, William
President, National Foreign Trade Council

Schwebel, Stephen
Independent Arbitrator and Counsel

Strand Rangnes, Margrete
Director of Labor, Workers’ Rights & Trade Program, Sierra Club

Wagner, Martin
Managing Attorney/ Director of International Program, EarthJustice

NOTE: The Subcommittee wishes to express its deep appreciation for the outstanding work of Mipe Okunseinde (Covington & Burling LLP) and Jeff Vogt (AFL-CIO) for their assistance in drafting and editing this report, as well as keeping the Subcommittee informed of relevant views and information during the deliberation process.

ANNEX B: PARTICULAR VIEWPOINTS OF SUBCOMMITTEE MEMBERS

Recognizing that members sometimes dampened their strongly held views in the interest of providing a report that reflects the balanced assessment of the group, we submit this Annex containing the particular viewpoints of several members of the Subcommittee. This Annex is meant to serve as a platform for the particular interests and suggestions that these individuals wished to bring to the attention of the Administration and which may not have had their full airing in the Report of the whole.

A collective statement from
Sarah Anderson, Institute for Policy Studies
Linda Andros, United Steelworkers
Marcos Orellana Cruz, Center for International Environmental Law
Elizabeth Drake, Stewart and Stewart
Kevin P. Gallagher, Boston University & Global Development and Environment Institute
Owen Herrnstadt, International Association of Machinists and Aerospace Workers
Matthew C. Porterfield, Harrison Institute for Public Law - Georgetown Law
Margrete Strand Rangnes, Sierra Club
Martin Wagner, Earthjustice

A collective statement from
Stephen Canner, Vice President of Investment and Financial Services, U.S. Council for International Business
Jennifer Haworth McCandless, Partner, Sidley Austin LLP
Linda Menghetti, Vice President, Emergency Committee for American Trade

A statement from Shaun Donnelly
Senior Director for International Business Policy, National Association of Manufacturers

A statement from Sean Heather
Executive Director - International Division, U.S. Chamber of Commerce

A statement from Toni Hennike
Coordinator - International Investments & Arbitration Law Department, Exxon Mobil

A statement from Mark Kantor
Washington, D.C.

A collective statement from
Laura Lane, Senior Vice President of International Government Affairs, Citigroup
Scott Miller, Director of Global Trade Policy, Procter & Gamble

A statement from Al Larson
Senior International Policy Advisor, Covington & Burling, LLP

A statement from Judge Stephen Schwebel
Independent Arbitrator and Counsel

A collective statement from:
Sarah Anderson, Institute for Policy Studies
Linda Andros, United Steelworkers
Marcos Orellana Cruz, Center for International Environmental Law
Elizabeth Drake, Stewart and Stewart
Kevin P. Gallagher, Boston University and Global Development and Environment Institute
Owen Herrnstadt, International Association of Machinists and Aerospace Workers
Matthew C. Porterfield, Harrison Institute for Public Law - Georgetown Law
Margrete Strand Rangnes, Sierra Club
Martin Wagner, Earthjustice

Contents
I. Introduction
II. Making Dispute Settlement Consistent with the Public Interest
III. Ensuring that Foreign Investors Do Not Have Greater Rights than U.S. Investors
IV. Protecting Health, Safety, and the Environment and Promoting Good Jobs
V. Preventing and Mitigating Financial Crisis
VI. Creating a Level Playing Field between State-Owned and Private Enterprises

I. Introduction

The authors of these comments wish to express their sincere appreciation to the other members of the Private Sector Advisory Subcommittee on Investment of the Advisory Committee on International Economic Policy (ACIEP). We are especially grateful for the atmosphere of collegiality that encouraged an open and frank discussion on various matters concerning the U.S. Model BIT. We learned a great deal from these discussions and welcome the opportunity in this annex to share some of our most pressing additional recommendations for change, as well as expanded explanations of some of the points raised in the main body of the Subcommittee report.

We feel this is a critical moment to take a fresh approach to bilateral investment treaties and the investment chapters of trade agreements. We are encouraged by President Obama’s statements indicating a commitment to make significant changes to the investment rules in U.S. trade agreements, which are similar to the rules in the U.S. model bilateral investment treaty. For example, President Obama has stated: “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.”

We were also pleased that at the recently held AFL-CIO Convention, President Obama committed to rebuild America by creating jobs that cannot be outsourced to other countries. We applaud him for all of his work and for undertaking such bold and much needed initiatives. We look forward to working with the administration to put these commitments into practice by establishing a whole new framework for the governance of international investment that protects the public interest in the United States and abroad.

Striking the right balance in a new Model BIT requires addressing in a meaningful way many valid concerns that labor unions and environmental, development, and other nongovernmental organizations have raised consistently for many years. Some primary examples:

Jobs, Capacity and Technology: Current investment rules facilitate and accelerate the off-shoring of U.S. jobs, capacity and technology by providing sweeping protections for U.S. investments abroad, without commensurate investor obligations to adhere, for instance, to internationally recognized worker rights. While strong labor provisions and a record of effective enforcement of those provisions should be a pre-condition for any negotiations, they are not enough. A whole new framework is needed to reverse the devastating impacts of offshoring on U.S. workers and communities.

Democracy: Current rules allow private foreign investors to bypass domestic courts entirely and take claims related to laws and regulations developed through the democratic process directly to international tribunals. If the challenge is successful, the host government is compelled to pay compensation to the investor, which may deter future adoption or enforcement of meaningful safety, worker, and environmental standards.

Environment: Many governments, including the United States, have had to spend millions of dollars defending legitimate environmental and health and safety protections against investor-state claims. The threat of such expensive lawsuits can also dissuade elected officials and regulators from taking responsible action to promote sustainable development, environmental protection, and human health and safety.

Since the last review of the U.S. model bilateral investment treaty in 2004, there have been several significant developments that make policy changes even more important:

The Global Financial Crisis: Current rules in the U.S. model bilateral investment treaty restrict governments from placing even temporary controls on capital flows, despite the fact that many countries have used this policy tool effectively to prevent or mitigate financial crisis. We also have strong concerns that the financial services rules do not sufficiently protect responsible government actions to ensure financial system stability or to facilitate economic recovery.

Surge in Foreign Investment into the United States: With foreign investment inflows into the United States increasing by more than 70 percent since 2004, the possibility that U.S. laws and regulations will be the target of investor claims is significantly greater than at the time of the last official BIT review.

II. Making Dispute Settlement Consistent with the Public Interest

We recommend that the administration replace investor-state dispute settlement with a state-to-state mechanism. If the administration continues to include an investor-state dispute settlement mechanism, investors should be required to exhaust domestic remedies before filing a claim before an international tribunal. That mechanism should also provide a screen that allows the Parties to prevent frivolous claims or claims which otherwise may cause serious public harm.

Investor-state claims often involve matters of vital importance to the public welfare, the environment, and national security. However, international arbitrators are not ordinarily well-versed in human rights, environmental law, or the social impact of legal rulings. Allowing private foreign investors to bring claims over such sensitive matters to international commercial arbitration tribunals is particularly disturbing when the disputes raise constitutional questions. For these reasons, we feel strongly that the Model BIT should provide only for state-to-state dispute settlement, which guarantees the crucial role of governments in determining and protecting the public interest.

However, if investors are still allowed to file claims against governments before international tribunals, they should at least be required to first exhaust domestic legal remedies. As noted in the Subcommittee report, the exhaustion requirement is a fundamental principle of international law.[i] It is also U.S. policy with regard to most claims by U.S. citizens against foreign governments.[ii] There is simply no need for foreign investors to pursue claims against the United States outside of the U.S. judicial system, unless it is in an attempt to obtain greater rights than those provided under U.S. law. In developing countries, the exhaustion requirement would promote a key U.S. foreign policy goal – the strengthening of domestic judicial systems. Requiring exhaustion would also restore some balance to a system that currently elevates the interests of foreign investors over other groups – including labor, environmental and human rights organizations – which do not enjoy comparable private rights of action to enforce international legal obligations.

By including a “futility” clause, the administration could avoid placing unreasonable costs on foreign investors. This would allow investors to proceed to international tribunals if, for example, domestic remedies caused undue delay[iii] or if domestic courts lacked jurisdiction to provide relief.[iv] Even if the domestic courts lacked jurisdiction to hear international law claims, the exhaustion requirement could be satisfied by raising the substance of the claim under domestic law.[v]

As noted in the Subcommittee report, we also recommend that in addition to requiring exhaustion of domestic remedies, the dispute settlement mechanism should provide a screen that allows the Party governments to prevent claims that are inappropriate, without merit, or would cause serious public harm.

III. Ensuring that Foreign Investors Do Not Have Greater Rights than U.S. Investors

There is broad, bipartisan support for the principle that the investor protection standards contained in U.S. investment agreements should not provide foreign investors with greater rights than those enjoyed by U.S. investors in the United States. Congress first instructed U.S. negotiators to comply with the “no greater rights” principle in the Trade Act of 2002.[vi] In May 2007, the Bush Administration and the Democratic leadership in the House of Representatives agreed that this principle would be explicitly stated in the preamble of the investment chapters of free trade agreements.[vii] And, as mentioned earlier, candidate Obama similarly pledged not to grant foreign investors any rights in the U.S. greater than those of Americans.[viii]

The provisions concerning indirect expropriation and the minimum standard of treatment in U.S. investment agreements are intended to reflect the relevant standards under customary international law, which is created through the “general and consistent practice of states followed by them from a sense of legal obligation.”[ix] Given that the U.S. Constitution provides among the highest levels of protection for property rights of any country, standards that are based on the general and consistent practice of nations regarding the protection of property rights would generally comply with the no greater rights principle.

Unfortunately, arbitral tribunals have not based their interpretations of the “indirect expropriation” and “minimum standard of treatment” provisions of investment agreements on the actual practice of nations, but rather have simply cited the characterization of these standards by other tribunals, using essentially a common law methodology to create “evolving” standards of investor protection.[x] The following recommendations respond to these and other provisions of the Model BIT that could conflict with the “no greater rights” mandate.

Recommendations:

1. We recommend that the administration consider codifying the State Department’s position in Glamis regarding the standard of proof for identifying principles of Customary International Law (CIL) in the Model BIT.

The 2004 Model BIT states that the minimum standard of treatment – including its “fair and equitable treatment” component – is limited to the customary international law standard for the treatment of aliens and does not encompass any additional rights.[xi] The Model BIT similarly states that the prohibition on uncompensated expropriation “is intended to reflect customary international law concerning the obligation of States with respect to expropriation.”[xii]

Annex A of the Model BIT further clarifies that customary international law “results from a general and consistent practice of States that they follow from a sense of legal obligation.” This language does not provide adequate guidance on the standard for demonstrating that a purported principle of customary international law exists. This uncertainty about the standard for demonstrating CIL has created uncertainty about the scope of the indirect expropriation and minimum standard of treatment obligations, which are derived from CIL.

As noted in the Subcommittee report, the State Department has provided useful guidance on this point in the memoranda it submitted on behalf of the United States in the recently concluded Glamis Gold Ltd. v. United States arbitration. The Model BIT should codify the State Department’s positions on these important principles in order to clarify the proper standard for establishing CIL, particularly as it relates to the minimum standard of treatment and expropriation.

2. We recommend that the administration consider codifying the State Department’s position in Glamis regarding the content of the minimum standard of treatment in the Model BIT.

As noted in the Subcommittee report, in Glamis, the State Department noted that state practice and opinio juris had established minimum standards of treatment with regard to foreign investors and investment in only a few areas.[xiii] Conversely, the State Department rejected Glamis’s assertion that the minimum standard of treatment prohibits either conduct that frustrates an investor’s expectations concerning an investment[xiv] or “arbitrary”[xv] conduct. Regarding Glamis’s claim that the minimum standard of treatment required compensation for measures that adversely affect an investor’s expectations, the State Department noted that such an interpretation was both inconsistent with the no greater rights mandate and unsupported by state practice.[xvi]

The asserted right to compensation for government measures that a tribunal deems “arbitrary” would similarly provide greater rights than the comparable standard under U.S. law. The Administrative Procedure Act does provide for review of certain final agency actions under an “arbitrary and capricious” standard of review. No comparable standard of review for economic legislation has been available, however, since the 1930s, when the Supreme Court abandoned the aggressive substantive due process review of the Lochner era.[xvii] Although substantive due process review of economic legislation remains theoretically possible, the post-Lochner standard is a highly deferential “minimum rationality” review, pursuant to which legislation will be upheld “unless in the light of the facts made known or generally assumed it is of such a character as to preclude the assumption that it rests upon some rational basis within the knowledge and experience of the legislators.”[xviii]

Not only would an international “arbitrary” standard of review for economic legislation provide greater rights than the highly deferential standard of review for substantive due process claims, it would also exceed the standard of protection afforded under the domestic law of other developed countries. The Supreme Court’s Lochner era jurisprudence, in fact, “stands as perhaps the paradigmatic instance of an ‘anti-model’ of comparative constitutional experience.”[xix] Accordingly, we recommend that the new Model BIT codify the State Department’s deferential interpretation of the minimum standard of treatment.

3. We recommend that the administration consider clarifying in the Model BIT that an “indirect expropriation” occurs only when a host state seizes or appropriates an investment for its own use or the use of a third party, and that regulatory measures that adversely affect the value of an investment but do not transfer ownership of the investment do not constitute acts of indirect expropriation.

The 2004 Model BIT contained several important clarifications concerning the standard for “indirect expropriation.” Two provisions in particular are significant: the language indicating that in order to constitute an expropriation a measure must affect a property right,[xx] and the statement that “[e]xcept in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriations.”[xxi]

Despite these reforms, however, there remains the potential that the indirect expropriation provisions of BITs could be applied in a manner that would violate the “no greater rights” principle by providing foreign investors with greater rights than the comparable protections of the Takings Clause of the Fifth Amendment of the U.S. Constitution.[xxii] For example, the Model BIT permits tax measures to be challenged as violations of the prohibition on uncompensated expropriations,[xxiii] and there is substantial precedent in international arbitral practice for finding that tax measures can constitute forms of indirect expropriation.[xxiv] Under the Fifth Amendment’s Takings Clause, in contrast, the Supreme Court has repeatedly rejected takings challenges to tax measures, even when the tax is set at a level that threatens the viability of a business.[xxv]

The restriction of expropriation claims to situations involving “property” as opposed to the more broadly defined “investment” is also inadequate to ensure compliance with the “no greater rights” principle, because it does not reflect that the requirement of compensation for “regulatory takings” under the Fifth Amendment of the U.S. Constitution has generally been only held to apply to regulations affecting real property.[xxvi] For example, the Supreme Court has indicated that personal property is unlikely to be the basis for a successful regulatory takings claim given that “in the case of personal property, by reason of the State's traditionally high degree of control over commercial dealings, [the owner] ought to be aware of the possibility that new regulation might even render his property economically worthless.”[xxvii]

Moreover, the indirect expropriation provision in investment agreements has been interpreted to require compensation based on the impact of the government measure on the value of the investment, regardless of whether there has actually been some appropriation of an asset by the government.[xxviii] This interpretation of the standard for indirect expropriation cannot be justified as reflecting the general practice of states, given that the dominant practice of nations is to provide for compensation only when the government has actually acquired an asset, not when the value of an asset has been adversely affected by regulatory measures.[xxix]

It may be argued that domestic legal standards regarding expropriation do not constitute relevant state practice with regard to international relations for the purposes of identifying customary international law. Domestic legal standards for expropriation, however, are relevant to the identification of state practice given that they generally define the standard of protection for both domestic and foreign property owners. There is no indication that it is the general and consistent practice of nations to provide foreign investors with a higher standard of protection with regard to regulatory expropriations than is provided to domestic investors. To the contrary, some jurisdictions – such as the United States with its “no greater rights” principle – explicitly link their international practice to their domestic standards of protection for property rights.

Accordingly, we recommend that the Model BIT clarify that an indirect expropriation occurs only when the government acts indirectly to seize or transfer ownership of an investment, and not when the government merely acts in a manner that decreases the value of profitability of an investment. This approach would be consistent with both the “no greater rights” mandate and the general practice of states that forms the basis of customary international law.

4. We recommend that the administration consider narrowing the definition of investment to include only the kinds of property that are protected by the U.S. Constitution. This would mean excluding the expectation of gain or profit and the assumption of risk. We also recommend excluding derivatives and caution against the inclusion of carbon offset contracts.

As noted in the Subcommittee report, the definition of “Investment” in Article 1 of the Model BIT is much broader than the real property rights and other specific interests in property that are protected under the U.S. Constitution. The inclusion of “futures, options, and derivatives” is also worrisome, given the troublesome role these instruments played in the financial crisis and ongoing regulatory reform efforts. We also strongly caution against expanding the definition of investment to include international offset contracts. This could undermine U.S. climate change efforts by giving rise to investor claims over government actions taken to ensure the integrity of the offset program, such as requirements that investors share profits with local communities or limit the project scope to respect indigenous rights.

5. We recommend that the administration consider revising the Model BIT to ensure that foreign investors may not use the most favored nation (MFN) principle to assert rights provided by other investment agreements or treaties.

The lack of clarity in the text of the 2004 Model BIT concerning MFN leaves open the possibility that foreign investors could claim greater rights than are provided under the BIT that was agreed to by their home country. Conversely, foreign investors who enjoy the right to MFN through an existing trade agreement or other treaty could wield that MFN obligation to demand the full new set of rights – both substantive and procedural – granted to foreign investors in the Model BIT. The unfettered application of the MFN clause in investment agreements would thus push towards a harmonized and enlarged system for the protection of investments, where investors could pick the most favorable standards and dispute settlement mechanisms.

6. We recommend that the administration consider explicitly limiting national treatment to instances in which a regulatory measure is enacted for a primarily discriminatory purpose.

The broad scope of the “national treatment” non-discrimination principle in the 2004 Model BIT leaves the principle open to interpretations by international tribunals that could have negative consequences for appropriate environmental, health and safety, and other public interest protections. As has been the case in WTO jurisprudence, the principle can be interpreted by tribunals as prohibiting regulatory actions that result in “de facto” discrimination, even when there is no facial or intentional discrimination involved. For example, an otherwise neutral regulatory action to protect the environment that results in a disproportionate impact on a foreign investor could run afoul of this standard.

7. We recommend that the administration consider revising Article 17 to ensure that foreign subsidiaries are not allowed to bring investment claims against a nation that is the home of their parent company.

The 2004 Model BIT’s language on Denial of Benefits contains a loophole that allows corporations to bypass their own country’s domestic courts by filing investor-state claims through foreign subsidiaries located in a BIT partner nation. This is explicitly permitted in Article 17.2, so long as the corporation has “substantial business activities” in the other Party. We are concerned that global corporations will inappropriately use this provision to avoid the normal “diversity of nationality” requirement for investors to state arbitration before international tribunals.

IV. Protecting Health, Safety, and the Environment and Promoting Good Jobs

1. We recommend that the administration consider providing a stronger exception for health, safety and environmental measures by deleting the phrase “otherwise consistent with this Treaty” in Article 12.2.

The 2004 Model BIT does not contain a general exception for “health, safety and environmental” (HSE) measures. This omission introduces a high level of uncertainty regarding the legality of measures adopted by the State to protect its people and environment from HSE threats. This uncertainty reduces the ability of the State to effectively respond to HSE risks.

In disputes concerning HSE measures, the absence of general exceptions for HSE measures places the interpretive focus on the substantive investment disciplines, such as expropriation, the fair and equitable treatment standard as an element of the minimum standard of treatment, and the non-discrimination standards. In this regard, it has been argued that there is no need for a general exceptions clause given that the substantive rules already provide sufficient flexibility to the State for the adoption of measures necessary to address health, safety and environmental threats. While certain flexibility does exist in certain disciplines, this is a matter of interpretation that is left to each tribunal. Consequently, there is no certainty that an investment tribunal will interpret the substantive rules in a way that provides sufficient flexibility to safeguard the regulatory needs of the host State. As noted earlier, the lack of certainty reduces the ability of the State to respond to HSE risks. Moreover, it is far from clear that existing flexibilities are sufficient to fully safeguard measures designed and applied for the protection of health, safety and the environment. In this regard, a general exceptions clause makes explicit what may be implicit, thereby providing guidance to tribunals as well as certainty to the law in a critical area of public policy.

The General Agreement on Tariffs and Trade (GATT), for example, contains general exceptions in Article XX for measures necessary for the protection of human, animal or plant life or health, or that relate to the conservation of exhaustible natural resources, provided that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade. These exceptions have been critical in ensuring that the United States can adopt measures to protect the environment and natural resources. For example, in US-Shrimp Turtle decided under the World Trade Organization, the general exceptions in Article XX of the GATT were critical to upholding the legality of U.S. measures adopted to protect endangered sea turtles.

In the context of performance requirements, the 2004 Model BIT already contains an exception for measures necessary to protect human, animal, or plant life or health, or related to the conservation of living or non-living exhaustible natural resources. While this exception is important in this particular context, it should nevertheless be designed to apply to the whole BIT. The fact that it only applies to performance requirements leads the treaty interpreter to question whether the drafters intended to exclude similar measures from the scope of application of other disciplines when in fact the need for such exceptions to safeguard governments’ ability to protect health, safety and the environment applies to all aspects of the BIT.

In the particular context of treaties for the protection of investments, countries like Canada, China, India, New Zealand and Singapore, for example, have incorporated general exceptions for the protection of health, safety or the environment, in varying formulations. Other countries, like Germany, have incorporated exceptions for particular disciplines, such as national treatment. These provisions are critical to ensuring that the State will be able to respond to health, safety and the environment threats and provide protection to its people and environment, without having to risk liability under the BIT. Accordingly, the Model BIT should include a general exception for measures related to the protection of health, safety and the environment, or to the conservation of natural resources.

2. We recommend that the administration consider transforming the hortatory and aspirational language in the “Investment and Environment” provision into a legal obligation subject to State-to-State dispute settlement.

  • In Article 12.1, the language “shall strive to ensure that it does not waive or otherwise derogate from” should be replaced by a firm obligation: “shall not waive or otherwise derogate from”.[xxx] The footnote to this article should be deleted to expand the scope of Article 12 to all environmental laws.
  • The Investment and Environment Provision should be subjected to State-to-State dispute settlement by deleting Article 37.5 and deleting the last sentence of Article 12.1.

The Model BIT, including its use of investor-to-State arbitration allowing private investors to file suit against legitimate health, safety and environmental measures, will continue to pose an obstacle to environmental protection, and sustainable development more generally, until environmental concerns are fully integrated into the Model’s legal framework. The current environmental provision only contains hortatory and aspirational language that stands in stark contrast with the mandatory and enforceable obligations established by other provisions of the Model. This hortatory and unenforceable provision is insufficient to prevent the Model BIT from driving or exacerbating environmental pollution or degradation, or unsustainable natural resource extraction, in the territories of BIT partners.

In order to address some aspects of this limitation, we recommend that the Administration consider revising Article 12(1) to establish an enforceable legal obligation, subject to State-to-State dispute settlement, generally requiring States to refrain from derogating from environmental laws to attract investments. This revision follows the U.S.-Peru Trade Promotion Agreement as well as agreements with Korea, Panama and Colombia. These agreements contain a commitment by parties to enforce their domestic environmental laws and comply with international environmental agreements adopted by both parties. These agreements do not require parties to achieve a given level of environmental protection, to adopt new environmental laws or to become parties to international agreements, but only to enforce their domestic laws and to comply with international environmental agreements. These agreements also subject this commitment to the same dispute settlement mechanism as that available for commercial disputes, thereby ensuring parity between commercial and environmental obligations.

Through these revisions, the Administration can demonstrate that it is just as important for BITs to reinforce the rule of law with respect to domestic environmental rules as it is with respect to economic concerns.

3. We recommend that the administration include in the preamble language that clarifies that the broader objective of the Model BIT is to contribute to sustainable development.

While the preamble of the 2004 Model BIT does not pose obligations per se, it plays a key role in the interpretation of the BIT, particularly in dispute settlement. The WTO’s experience has shown the critical importance of the reference to sustainable development and environmental protection in the preamble of the WTO Agreement. This language has enabled greater integration and mutual supportiveness of the environmental, social and economic regimes underlying health, safety and environmental measures, thereby allowing the WTO to depart from narrow trade goals and embrace the broader objective of sustainable development. The 2004 Model BIT, in order to adequately frame its objective and thereby avoid unidirectional, investor-above-all interpretations that disregard the public interest, should clarify that the objective of the treaty is sustainable development, and that protection of investments is a means to achieve it this objective.

4. We recommend that the administration consider requiring Parties to adopt and maintain laws and regulations consistent with the ILO core labor rights, as defined by the core conventions, and to effectively enforce them, as well as laws and regulations related to acceptable conditions of work, and to provide an effective mechanism to enforce those and other labor commitments.

Five years ago, labor representatives stated in their comments to the ACIEP: “While we can envision a system of international investment rules that would benefit workers in the U.S. and abroad by creating jobs, guaranteeing workers’ rights, regulating corporate behavior, and disciplining government practices that unfairly distort investment flows, the BIT program does not achieve these goals.” Nothing that has occurred in the past five years and nothing that is reflected in the Investment Subcommittee’s consensus report change that position.

Since we expressed these objections in 2004, our fundamental concerns have only deepened. Millions of jobs have since been lost and many U.S.-based corporations continue to transfer production abroad. Far too often, outsourcing of this nature is initiated to take advantage of workers in other countries who do not enjoy fundamental human rights, like the right to form a union and to engage in collective bargaining. Our current approach to investment policy, as reflected by the Model BIT, contributes greatly to these job losses. They encourage the transfer of investment to other countries by providing stability, security, and predictability that otherwise would make overseas investments unattractive and too costly.

While strong labor provisions that explicitly incorporate international labor standards as reflected by the ILO and the effective enforcement of those provisions prior to entering into any BIT are essential to any new approach, they are not enough. U.S. workers have suffered too many jobs losses, communities have been decimated, and hope is fast disappearing for the millions of unemployed workers and the millions of more workers who are forced to accept part time and low wage jobs.

This is why a new approach to a BIT must reflect a comprehensive approach to rebuilding our economy. It must be part of a jobs policy that will restore our industrial base, making it vibrant and sustainable well into the future. Adopting a BIT that is not reflective of the need for a national jobs policy and that does not responsibly constrain corporations from transferring production, services, and technology is not in the in the best interest of U.S. workers, their communities, or the nation.

The above notwithstanding, the current labor protections reflected in the 2004 Model BIT are woefully inadequate. The major problems include:

1. In Article 13.1, a party does not have an absolute obligation not to waive or derogate from its domestic labor laws (or offer to do so) in order to encourage investment. It needs only to strive not to do so. One could argue that a party has not striven to ensure that it does not waive or derogate if in fact the party has waived or derogated; however, an affirmative prohibition would provide a clearer and more enforceable obligation.

2. Article 13.2 refers to “internationally recognized worker rights.” This language is culled from our trade preference programs, dating from the 1984 Generalized System of Preferences. The standard is long outdated. For example, “internationally recognized worker rights” does not include non-discrimination in employment, which the ILO has defined as a core labor right in the 1998 ILO Declaration on Fundamental Principles and Rights at Work. Subsequent trade-related legislation and trade agreements have also since referred to “core labor standards” or to the 1998 ILO Declaration, which enumerates the core labor rights. The Model BIT must adopt a definition of international labor standards that refers to the core labor rights as they are defined in the ILO Conventions and developed in the accompanying jurisprudence.

3. The BIT does not require a country to have any labor laws, just not to waive or derogate from them if it has them. There is not even an obligation to improve laws over time so that they may eventually be consistent with the core labor rights. The lack of any minimum standard with regard to labor laws is a major flaw.

4. If one party has encouraged investment by waiving or derogating from its labor laws, the only available remedy is state-to-state consultations. There are several problems here: 1) A worker aggrieved by a party’s decision not to enforce its laws on freedom of association in order to retain investment, for example, has no specific role in this process. Certainly, the party that waived the right is unlikely to be receptive to the complaints of its workers, and such workers may not have easy access to U.S. officials responsible for raising such issues under a BIT; 2) A violation of the labor provisions can proceed to consultations but is explicitly excluded from state-to-state dispute resolution (Article 37.1 and 37.5). If the matter is not resolved in the consultations, then workers are simply out of luck; and 3) The Parties are to consult “with a view to avoiding any such encouragement.” This ambiguous language could be read to require a party do nothing more than to make an effort to have the other party rethink its action. The purpose of the consultation should be to have the other party either enforce its law as it applies to the investment, or, if the act in question was a weakening or repeal of a law, to nullify that weakening or repeal. As a matter of principle, we strongly recommend that the remedies available under any dispute mechanism regarding international labor standard violations should be as effective as they are for investors.

V. Preventing and Mitigating Financial Crises

As the United States and the rest of the world have learned the hard way, an un-regulated and unstable financial system can lead to financial crises and have a profound effect on jobs, livelihoods, growth, and economic development. The following recommendations are aimed at ensuring that the United States and its BIT partners have the necessary flexibility to utilize a wide array of measures to prevent and mitigate future such crises.

Recommendations:

1. We recommend that the administration consider undertaking a thorough legal review of the potential that any of the measures that it has implemented (or is contemplating implementing) in response to the financial crisis might be inconsistent with any standard of investor protection contained in U.S. BITs.

There is a growing body of literature discussing the potential that measures adopted by the United States and other countries in response to the financial crisis will result in international legal disputes. Most of the discussion thus far has focused on the potential for state-to-state trade disputes pursuant to the WTO’s dispute settlement process.[xxxi]

A recent study by Anne van Aaken and Jürgen Kurtz, however, concludes that “international investment law is, in the short-term, more likely than any other area of international economic law to give rise to complaint and initiation of legal action” based on government measures adopted to address the financial crisis.[xxxii] Among the factors the authors cite in support of this conclusion is the availability of investor-state arbitration for investment claims, which reduces the deterrent effect that the potential for retaliatory complaints may have on state-to-state disputes over trade rule violations.

Certain types of emergency financial measures appear to be vulnerable to challenge under the terms of the 2004 Model BIT. To the extent that U.S. emergency financial measures have taken the form of “subsidies or grants...including government-supported loans, guarantees, and insurance,” they are carved out from some obligations under the Model BIT, including national treatment and most favored nation treatment. See 2004 Model BIT, art. 14(5). This provision, however, does not apply to the minimum standard of treatment obligation and its “fair and equitable treatment” component.

Accordingly, certain financial bailout measures could be challenged on the grounds that they denied a foreign investor’s right to fair and equitable treatment. For example, it could be argued that a foreign financial institution operating in the United States was denied fair and equitable treatment because it was not provided with access to the same bailout programs as U.S. banks.[xxxiii] A similar argument was made in an investor-state case against the Czech Republic, in which a Dutch subsidiary of a Japanese bank successfully argued that the Czech Republic had violated its right to fair and equitable treatment by excluding a small bank in which it had invested from a bailout program made available to larger Czech banks.[xxxiv]

2. We recommend that the administration also consider conducting a thorough legal review of the “prudential measures” exception in the 2004 Model BIT. Based on the outcome of these legal reviews, the U.S. government should consider including a stronger prudential measures exception. Specifically, the U.S. government should consider eliminating the arguably self-canceling second sentence of Article 20.1, and including language indicating that the prudential measures exception is self-judging (similar to the language in the essential security provisions of recent FTAs).[xxxv]

Article 20.1 of the Model BIT is aimed at protecting government actions to secure the integrity and stability of its financial system from challenge. However, a noted in the Subcommittee report, the second sentence of that provision is unclear and could be interpreted in a manner that would undermine the overall prudential exception.[xxxvi] It’s worth noting that this potentially “self-canceling” sentence is absent from an otherwise similar section of North American Free Trade Agreement (Article 1410.1). Yet even the NAFTA provision has been interpreted as permitting tribunals to review financial measures to determine whether they are “reasonable” or “arbitrary.”[xxxvii] Accordingly, even if the second sentence of Article 20.1 is deleted, language clarifying that the prudential measures exception is intended to be self-judging is necessary unless the U.S. government intends to subject its applications of the exception to review by investment tribunals.

3. We recommend that the administration consider including a temporary safeguard provision in the Model BIT for balance of payments and other financial crises that is not subject to investor-state dispute settlement.

Many noted economists and international institutions (such as the IMF) recognize that while capital account liberalization may be a desirable goal for some nations, the process should be gradual and sequenced. Even then, there may be circumstances in which capital account management is necessary to address massive inflows and outflows of short-term capital leading up to and resulting from a financial crisis.[xxxviii] This volatility also hurts U.S. investors in countries experiencing uncontrolled massive capital flight, since it often leads to significant currency depreciations, which could reduce the value of these investors’ host country revenues and increase the cost of any imported inputs. However, the 2004 Model BIT essentially forces BIT partners to liberalize their capital accounts, regardless of the nation’s institutional capacity -- or be prepared to literally pay the consequences.

As noted in the Subcommittee report, IMF officials explained to members of the Subcommittee that the IMF’s Articles of Agreement do not require member states to obtain IMF approval before applying restrictions on capital transactions.[xxxix] An IMF official also stated that it is the official IMF board and staff position that capital account liberalization needs to be sequenced and that temporary exceptions to such liberalization may be needed in some circumstances to prevent and mitigate financial crises—particularly to regulate inflows and outflows of short-term capital. He also raised concerns about a potential circumstance in which a country had a BIT with the United States and elected to impose capital controls, because they would have to apply the controls in a discriminatory way (not on U.S. investors but only on those from other countries). The IMF official said that during the negotiations for a Multilateral Agreement on Investment (MAI) the IMF advocated for such an exception and was able to include a temporary safeguard measure in the final draft of the MAI. [xl]

The IMF has advised at least two countries to impose capital controls to prevent or mitigate a crisis -- Estonia and Peru. Moreover, the IMF was supportive of capital controls introduced by national governments in seven of the twelve cases in the 1990s.[xli] In the current crisis, the IMF has been supportive of the capital controls deployed by Iceland.[xlii]

Below we offer sample language based on the MAI text. We recommend that the administration consider including a safeguard provision that is not subject to investor-state dispute settlement. At most, the provisions should be subject to state-to-state dispute settlement, and even then such procedures should only be available after enhanced consultation procedures are undertaken. Parties may be required to consult with other Parties on any safeguard measure, but such consultations should provide the primary means of ensuring consistency with the Agreement.

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

TEMPORARY SAFEGUARD

1. A Party may adopt or maintain measures inconsistent with its obligations under the transfers section as a temporary safeguard in the event of serious balance-of-payments and external financial difficulties or threat thereof.

2. Measures referred to in paragraph 1:
(a) shall be consistent with the Articles of Agreement of the International Monetary Fund;
(b) shall not exceed those necessary to deal with the circumstances described in paragraph 1;
(c) shall be temporary and shall be eliminated as soon as conditions permit;
(d) shall be promulgated and applied in good faith and in an equitable and non-discriminatory manner.

3. Measures referred to in paragraph 1 and any changes therein that are approved by the International Monetary Fund in the exercise of its jurisdiction shall be considered as consistent with this Article.

4. (a) Measures referred to in paragraph 1, and any changes therein, shall be promptly notified to the other Party.
(b) A Party applying a measure referred to in paragraph 1, or making any changes therein, shall consult promptly with the other Party regarding the measure and any changes therein.
(c) The consultations referred to in paragraph 4(b) shall occur within six months of the adoption of a measure referred to in paragraph 1 and every six months thereafter until the measure’s elimination.

4. We recommend that the Administration consider excluding “sovereign debt” from Article 1 definitions of an investment.

Unlike the North American Free Trade Agreement, the U.S. Model BIT does not explicitly exclude sovereign debt from the definition of covered investments.[xliii] The U.S. government is the largest issuer of sovereign debt, and recent steep increases in such debt levels have prompted the Chinese government and other foreign investors to express concerns about the safety of their investments in U.S. government debt. The risk of default is of course much higher in the world’s poorest countries. The IMF has reported that 28 countries have accumulated debt in excess of 60% of GDP as a result of the current crisis.[xliv]

In the July 31, 2009 meeting with several members of the Subcommittee, a senior IMF legal official raised concerns that efforts to restructure unsustainable public debts may give rise to investor-state claims. The prospect of another round of debt crises has renewed interest in developing a permanent sovereign debt work-out procedure. A UN Commission on the financial crisis, for example, stated that “There is an urgent need for renewed commitment to develop an equitable and generally acceptable Sovereign Debt Restructuring Mechanism.”[xlv] These efforts, however, could be undermined if bondholders are able to circumvent such mechanisms by filing claims under BITs. We note, however, that the debt of state-owned enterprises (SOEs) should not be excluded from the definition of investment under Article 1, as that result would provide an unfair competitive advantage to SOEs with deleterious affects on U.S. competitors.

Some post-NAFTA U.S. trade agreements and bilateral investment treaties include special annexes on debt restructuring.[xlvi] These annexes are problematic for several reasons. First of all, they allow investor-state claims over debt restructuring when such restructuring violates National and Most Favored Nation treatment. There are several reasons why a country might need to resort to offering preferential conditions to domestic creditors in the aftermath of financial crises, particularly when the domestic debt is associated with meeting wage, salary, pension and other social obligations. Another problem is that these annexes set a deadline of 270 days for governments to secure agreements with creditors before investor-state claims can proceed. Experience shows that it is difficult to bring all creditors together in one forum to obtain agreement on a haircut across all bond issuance categories. This hard deadline therefore may encourage foreign creditors to hold out for bigger potential payoffs through investor-state claims than they might receive in a negotiated restructuring.

VI. Creating a Level Playing Field Between State-Owned and Private Enterprises

1. We recommend that the administration consider including in the Model BIT a provision to ensure that State-Owned Enterprises (SOEs) which invest in productive assets in the United States do not receive financing and inputs at below market rates or access to other anti-competitive subsidization by a foreign government.

Draft Language:

Each Party shall ensure that state enterprises (meaning an enterprise owned or controlled by a Party) investing in the territory of the other Party do not receive financing of covered investments at below-market interest rates or receive other anticompetitive subsidization regarding such covered investments.

As investment flows into the United States continue to grow, it can be anticipated that investment into the U.S. market will continue to expand substantially.[xlvii] Consequently, BITs can no longer be viewed solely as a package of rights and obligations to protect outward investment by U.S. investors in less developed nations. BIT obligations apply with equal force to investments within the United States by foreign companies and governments, including SOEs.

A Model BIT must address the impact on domestic competitiveness and maintaining and creating jobs and technology in the United States. What is good for America’s global corporations is no longer necessarily good for the American economy. In particular, the consequences of inward investments made by foreign SOEs on our domestic industries and workforce should be taken into account. A Model BIT must ensure that such foreign nationals are not permitted to gain an unfair competitive advantage in such acquisitions. A BIT model should address significant domestic competitiveness issues to balance these domestic interests with the interests of outbound investors. This is especially the case when considering entering into BITs with developing countries like China, which has massive reserves available for foreign investment, is searching the globe to secure finite resources and where at least half the production is in the hands of SOEs. China engages in trade based on mercantilist principles and has a strategic industrial policy meant to create and expand industrial sectors with the intent of becoming dominant within China and globally. In fact, China has targeted ten sectors or “pillars”, including steel, telecommunications and aerospace. To achieve dominance, the Chinese government subsidizes home-grown enterprises (commonly SOEs), manipulates its currency for export advantage and insulates its domestic enterprises from foreign competitors in a host of ways. China also uses access to its market as a means to force technology transfers. All of these policies have one thing in common – they advance Chinese industries often at the expense of foreign competitors. Certainly, such anti-competitive policies have created disadvantages for U.S. companies investing in China.[xlviii]

There can be no reasonable expectation that China, or other countries with similar industrial policies and significant SOEs, will on their own initiative adopt inherently different or more market-based, hands-off policies as they look to expand their economic prospects by investing in the United States. Rather, it can be expected that countries like China will seize the opportunity (and the insulation afforded under a BIT) to invest in the U.S. market to advance the domination of their industries in the same way as in their home countries. In either or both circumstances, such policies also can distort competition in third country markets. Likewise, it should be borne in mind that governments, particularly non-democratic ones, may have more than pure commercial interests behind any particular foreign investment decision. Indeed, in addition to the described industrial policies, China has a “go out” strategy, which involves the purchase of on-going, successful enterprises and brand acquisitions, in particular involving finite and commercially critical resources like oil, gas and gold.[xlix]

This raises at least two broad concerns involving SOEs investing in the U.S. market under the protection of a BIT, which U.S. laws, such as anti-trust law or the CFIUS regime, may not be amenable to addressing in a meaningful manner.[l] First, there is a potential problem with regard to SOEs that are subsidized by their governments and likely to purchase productive assets in the U.S. under the protection of a BIT. In that circumstance, an SOE could gain an unfair advantage over similarly situated domestic competitors. For example, a Chinese SOE may decide to purchase a manufacturing plant (a purchase subsidized by the Chinese government) and may also export inputs from China (subsidized by the Chinese government) to maintain and create jobs in China,[li] or a subsidized Chinese SOE could purchase an enterprise in the U.S. solely to gain technology, which could be shipped back to China for future development and control. In all of these instances, U.S. manufacturing capacity, innovation and job creation could be adversely affected, thus undermining our domestic competitiveness. As noted above, President Obama has spoken eloquently on the need to rebuild a vibrant American manufacturing sector.

Second, as discussed above, the current BIT extends to a foreign investor -- like an SOE -- greater process rights than domestic investors. Under the protection of the BIT attempts by governmental entities in the United States to discipline an SOE for anti-competitive behavior (as illustrated above) could be evaded by recourse in the first instance to an arbitral panel. For instance, a Chinese SOE could rely on overly broad definitions of expropriation, investment and “fair and equitable treatment” to bring arbitral claims, arguing that application of anti-trust laws has been applied in a discriminatory manner against their investment and thus has resulted in an indirect expropriation under the BIT. This could well have a very deleterious impact on the ability of the United States to ensure an open and competitive marketplace free of foreign government intervention.

A new BIT model should strike a balance that ensures that foreign SOEs operating in the United States do not import anti-competitive industrial policies (e.g., subsidization) that result in the undermining of our domestic competitiveness, productive capacity, innovation and job creation. A BIT should not offer protection to SOEs that operate in such a manner but rather provide meaningful disciplines to ensure open and fair competition in the United States free from anticompetitive foreign government intervention.[lii]

This recommendation is consistent with the recent OECD Declaration on Sovereign Wealth Funds and Recipient Country Policies. Under that Declaration, recipient countries “…should not discriminate among investors in like circumstances.” Investors that have access to unlimited sovereign government largess, and those who do not, are not “in like circumstances.”

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[i] Interhandel Case (Switz. v. U.S.), 1959 I.C.J. Rep. 5, 27 (Mar. 21).

[ii] See U.S. Department of State, Bilateral Investment and Other Bilateral Claims, available at http://www.state.gov/s/l/c7344.htm:

Under international law and practice the United States does not formally espouse claims on behalf of U.S. nationals unless the claimant can provide persuasive evidence demonstrating that certain prerequisites have been met. The most important of these requirements [include] that all local remedies have been exhausted or the claimant has demonstrated that attempting to do so would be futile ... .

[iii] See, e.g., El Oro Mining and Railway Co. Case (Gr. Brit. v. Mex.), 5 Int'l Arb. Awards 191, 198 (Perm. Ct. Arb. 1931).

[iv] See, e.g., Panevezys-Saldutiskis Railway (Est. v. Lith.), 1939 P.C.I.J. (ser. A/B) No. 76, at 18 (Feb. 28) (“There can be no need to resort to the municipal courts if those courts have no jurisdiction to afford relief . . .”) See also generally The Finnish Ships Case (Finland v. United Kingdom), 3 R. Int'l Arb. Awards 1484 (1934) (domestic judicial appeal not required where it would not afford a basis for reversing determination of British Admiralty Transport Arbitration Board that the British government had not requisitioned certain Finnish ships).

[v] Elettronica Sicula S.p.A. (ELSI) (U.S. v. Italy), 1989 I.C.J. 15, 45-46 (July 20) (exhaustion requirement satisfied where “the substance of the claim” brought in domestic court “is essentially the same” as the international claim).

[vi] Trade Act of 2002, H.R. 3009, 107th Cong. § 2102(b)(3) (2002).

[vii] See Office of the United States Trade Representative, Bipartisan Agreement on Trade Policy: Investment (May 2007), available at http://www.ustr.gov/sites/default/files/uploads/factsheets/2007/asset_upload_file146_11282.pdf

[viii]See Pennsylvania Fair Trade Coalition, 2008 Presidential Candidate Questionnaire, answer of Sen. Barack Obama, question 10, available at http://www.citizenstrade.org/pdf/QuestionnairePennsylvaniaFairTradeCoalition040108FINAL_SenatorObamaResponse.pdf. Secretary of State Clinton also endorsed the no greater rights principle during the 2008 campaign. See Texas Fair Trade Coalition, Presidential Candidate Questionnaire, Answer of Sen. Hilary Rodham Clinton, question 6 (“I will ensure that foreign companies do not have greater rights than American companies.”), available at http://www.texasfairtrade.org/documents/HillaryClintonQuestionnaireResponse.pdf

[ix] RESTATEMENT (THIRD) OF THE FOREIGN RELATIONS LAW OF THE UNITED STATES, § 102(2) (1987).

[x] See generally Matthew C. Porterfield, An International Common Law of Investor Rights? 27 U. Pa. J. Int’l Econ. L. 79 (2006).

[xi] See 2004 Model BIT, art. 5(2).

[xii] See 2004 Model BIT, Annex B, para. 1.

[xiii] See U.S. Counter-Memorial at 221 (footnotes omitted):

Sufficiently broad State practice and opinio juris have thus far coincided to establish minimum standards of State conduct in only a few areas. Article 1105(1) embodies, for example, the requirement to provide a minimum level of internal security and law and order, referred to as the customary international law obligation of full protection and security. Similarly, Article 1105 recognizes that a State may incur international responsibility for a “denial of justice” where its judiciary administers justice to aliens in a “notoriously unjust” or “egregious” manner “which offends a sense of judicial propriety.” In addition, the most widely-recognized substantive standard applicable to legislative and rule-making acts in the investment context is the rule barring expropriation without compensation, but that obligation is particularized in the NAFTA under Article 1110.

[xiv] See U.S. Counter-Memorial at 233:

While the minimum standard of treatment under customary international law requires compensation in the event of an expropriation, there is no such rule requiring compensation for actions that fall short of an expropriation but that frustrate an alien’s expectations. Certainly, Glamis has made no showing that States refrain out of a sense of legal obligation from taking regulatory action that may frustrate an alien’s expectations. Indeed, most, if not all, regulatory action is bound to upset the expectations of a portion of the populace. If States were prohibited from regulating in any manner that frustrated expectations – or had to compensate everyone who suffered any diminution in profit because of a regulation – States would lose the power to regulate.

[xv] See U.S. Counter-Memorial at 227 (“Glamis has also failed to present any evidence of relevant State practice to support its contention that Article 1105(1) imposes a general obligation on States to refrain from ‘arbitrary’ conduct.”)

[xvi] See: U.S. Counter-Memorial at 234 and note 1017 ("United States law does not compensate plaintiffs solely upon a showing that regulations interfered with their expectations, as such a showing is insufficient to support a regulatory takings claim . . . It is inconceivable that the minimum standard of treatment required by international law would proscribe action commonly undertaken by States pursuant to national law.")

[xviii] United States v. Carolene Products, 304 U.S. 144, 152 (1938). In the context of exercises of executive authority, the Supreme Court has indicated that conduct that “shocks the conscience” violates substantive due process. See County of Sacramento v. Lewis, 523 U.S. 833, 846 (1998). Although the Court has not applied this standard to economic legislation, it is arguably comparable to the current deferential standard of substantive due process review of economic regulations. Accordingly, given the similarity of the “conscience shocking” formulation of substantive due process to the traditional Neer test for the minimum standard of treatment, the Neer standard could be interpreted as consistent with the “no greater rights” principle.

[xix] Sujit Choudhry, The Lochner Era and Comparative Constitutionalism, 2 Int'l J. Const. L. 1, 3 (2004).

[xx] See 2004 Model BIT, Annex B, para. 2.

[xxi] Id., para 4(b).

[xxii] See generally, Matthew C. Porterfield, International Expropriation Rules and Federalism, 23 Stanford Envt’l L. J. 3, 43-62 (2004) (comparing international standard for regulatory expropriation with U.S. regulatory takings doctrine).

[xxiii] See 2004 Model BIT, Article 21 (Taxation).

[xxiv] See generally Thomas W. Wälde and Abba Kolo, Taxation and Modern Investment Treaties, in The Oxford Handbook of International Investment Law at 347 - 352 (2008).

[xxv] See, e.g., Pittsburgh v. Alco Parking Corp., 417 U.S. 369, 373 (1974) (rejecting a takings challenge to a tax on gross receipts from parking facilities, and noting that “the Court has consistently refused either to undertake the task of passing on the ‘reasonableness' of a tax that otherwise is within the power of Congress or of state legislative authorities, or to hold that a tax is unconstitutional because it renders a business unprofitable.”)

[xxvi] See Eduardo Moisès Peñalver, Is Land Special? 31 Ecology L.Q. 227, 231 (2004) (“it is almost beyond dispute that . . . the [Supreme] Court has focused overwhelmingly on regulations affecting land and that landowners bringing regulatory takings claims stand a greater chance of prevailing in the Supreme Court than the owners of other sorts of property”); Molly S. McUsic, The Ghost of Lochner: Modern Takings Doctrine and Its Impact on Economic Legislation, 76 B.U. L. Rev. 605, 647, 655 (1996) (“Economic interests, such as personal property, trade secrets, copyright, and money, are all recognized by the Court as ‘property’ under the Fifth Amendment, but receive little protection against government regulation.”) J. Peter Byrne, Ten Arguments for the Abolition of Regulatory Takings Doctrine, 22 Ecology L.Q. 89, 127 (1995) (“the Supreme Court has shown absolutely no interest in applying the regulatory takings doctrine to assets other than land”).

[xxvii] Lucas v. South Carolina Coastal Comm’n, 505 U.S. 1003, 1027-28 (1992). The Supreme Court’s decision in Ruckelshaus v. Monsanto Co., 467 U.S. 986 (1984), which involved a claim that the disclosure of trade secrets by the federal government constituted a taking, is sometimes cited as an example of the application of the regulatory takings analysis outside the context of real property. The Court in Monsanto, however, stressed that “[w]ith respect to a trade secret, the right to exclude others is central to the very definition of the property interest. Once the data that constitute a trade secret are disclosed to others, or others are allowed to use those data, the holder of the trade secret has lost his property interest in the data.” Monsanto, 467 U.S. at 1012. Accordingly, “Monsanto is a case in which the government conduct in question was the functional equivalent of a direct appropriation of the entire piece of property, as opposed to a mere regulation of that property.” Eduardo Moisès Peñalver, Is Land Special? 31 Ecology L.Q. 227, 231, n. 20 (2004).

[xxviii] Andrew Newcombe, The Boundaries of Regulatory Expropriation in International Law, 20:1 ICSID Review – FILJ at 4 (2005) (noting that “under the ‘orthodox approach’ [a regulatory] expropriation occurs when a foreign investor is deprived of the use, benefit, management or enjoyment of all or substantially all of its investment” rather than whether the government has actually appropriated the investment for its own use).

[xxix] See A.J. Van der Walt, Constitutional Property Clauses: A Comparative Analysis (1999) at 17 (“the distinction between police-power regulation of property and eminent-domain expropriation of property is fundamental to all [constitutional] property clauses, because only the latter is compensated as a rule. Normally, the will be no provision for compensation for deprivations or losses caused by police-power regulation of property.”) United States law is an exception in this regard, and under certain circumstances – most notably in the “rare circumstance” when a regulatory measure destroys all value of real property – requires compensation even when there has been no appropriation of the property by the government. See Lucas v. South Carolina Coastal Comm’n, 505 U.S. 1003 (1992).

[xxx] This language has already been introduced in the Peru-U.S. FTA, Article 18.3.2.:

The Parties recognize that it is inappropriate to encourage trade or investment by weakening or reducing the protections afforded in their respective environmental laws. Accordingly, a Party shall not waive or otherwise derogate from, or offer to waive or otherwise derogate from, such laws in a manner that weakens or reduces the protections afforded in those laws in a manner affecting trade or investment between the Parties.

[xxxi] See, e.g., Gary Hufbauer, Luca Rubini and Yee Wong, Swamped by Subsidies:Averting a US-EU Trade War after the Great Crisis (August 4, 2009). See also Subsidies Rules and Financial Services Bailouts (August 7, 2009), International Law and Economic Policy Blog, available at http://worldtradelaw.typepad.com/ielpblog/2009/08/subsidies-and-services.html.

[xxxii] Anne van Aaken and Jürgen Kurtz, The Global Financial Crisis and International Economic Law at 2 (June 2009), forthcoming in: Simon Evenett and Bernard Hoekman (Eds.) Trade Implications of Policy Responses to the Crisis (Washington: World Bank Publication, forthcoming 2009), available at http://ssrn.com/abstract= 1417957.

[xxxiii] See Todd Tucker, Eyes on Trade (August 5, 2009) (“no foreign bank got TARP money, or had access to many of the other bailout programs”), available at http://citizen.typepad.com/eyesontrade/2009/08/the-most-awesome-wto-agreement-that-no-one-can-remember.html.

[xxxiv] See Saluka Investments BV v. The Czech Republic, UNCITRAL, Award (Mar. 17, 2006), available at http://ita.law.uvic.ca/documents/Saluka-PartialawardFinal.pdf.

[xxxv] See, e.g., U.S. –Colombia FTA, art. 22.2, footnote 2 (“For greater certainty, if a Party invokes [the essential security exception] in an arbitral proceeding initiated under Chapter Ten (Investment) or Chapter Twenty-One (Dispute Settlement), the tribunal or panel hearing the matter shall find that the exception applies.”)

[xxxvi] The second sentence of that provision reads as follows: “Where such measures do not conform with the provisions of this Treaty, they shall not be used as a means of avoiding the Party’s commitments or obligations under this Treaty.”

[xxxvii] See Fireman’s Fund Insurance v. United Mexican States, ICSID Case No. ARB(AF)/02/01 (Award of July 17, 2006), paras. 166-68.

[xxxviii] In a thorough and recent review of the literature, former IMF economist Carmen Reinhart and Nicolas Magud write: "In sum, capital controls on inflows seem to make monetary policy more independent, alter the composition of flows, and reduce exchange rate pressures." See (Magud, Nicolas, and Carmen Reinhardt (2007), "Capital Controls: An Evaluation," Capital Controls and Capital Flows in Emerging Economies, Sebastian Edwards (editor), Cambridge: National Bureau of Economic Research).

[xxxix] See “Transfer of Funds,”http://www.unctad.org/en/docs/psiteiitd20.en.pdf

[xl] OECD, Multilateral Agreement on Investment, Draft Consolidated Text, April 22, 1998. See: http://www1.oecd.org/daf/mai/pdf/ng/ng987r1e.pdf

[xli] See page 43-44 of aforementioned IMF report noted in footnote 3

[xlii] International Monetary Fund, “Interview with IMF mission chief for Iceland, Poul Thomsen,” December 2, 2008. http://www.imf.org/external/pubs/ft/survey/so/2008/INT111908A.htm.

[xliii] Article 1 of the 2004 U.S. Model BIT includes in the definition of investment "bonds, debentures, other debt instruments, and loans.” NAFTA Chapter 14 on Financial Services, Article 1416, reads: Definitions, reads: investment means "investment" as defined in Article 1139 (Investment Definitions), except that, with respect to "loans" and "debt securities" referred to in that Article:
(a) a loan to or debt security issued by a financial institution is an investment only where it is treated as regulatory capital by the Party in whose territory the financial institution is located; and
(b) a loan granted by or debt security owned by a financial institution, other than a loan to or debt security of a financial institution referred to in subparagraph (a), is not an investment;
for greater certainty:
(c) a loan to, or debt security issued by, a Party or a state enterprise thereof is not an investment;

[xliv] International Monetary Fund, “The Implications of the Global Financial Crisis for Low-Income Countries,” March 03, 2009. See: http://www.imf.org/external/pubs/ft/books/2009/globalfin/globalfin.pdf

[xlv] United Nations, “Recommendations by the Commission of Experts of the President of the General Assembly on reforms of the international monetary and financial system,” March 19, 2009. See: http://www.un.org/ga/president/63/letters/recommendationExperts200309.pdf.

[xlvi] See, for example, the U.S.-Peru Trade Promotion Agreement and the U.S.-Colombia FTA (not yet ratified), as well as the U.S.-Uruguay BIT.

[xlvii] In 2007, foreign direct investment reached $2.1 trillion, and since 2004 has increased by over 70 percent.

[xlviii] Others on the BIT review sub-subcommittee recognize the many ways in which SOEs engage in anticompetitive behavior within host countries, particularly China, to the disadvantage of U.S. investors and have advanced proposals to amend the Model BIT to provide for means to discipline such anticompetitive affects in the host country.

[xlix] As part of its “go-out’ policy China uses its own EX-IM bank, which has been described as not following market-based OECD rules in a recent EX-IM Bank competition report.

[l] Anti-trust or tax laws may not be able to address adequately such competition issues and trade remedies only address imports. Likewise, CFIUS may not be sufficient to address the question of a SOE purchasing a productive asset when that purchase does not implicate what traditionally has been deemed to impact our national security interests.

[li] A Chinese pipe-maker and SOE, Tanjin Pipe, is readying a million ton pipe-making capacity in Texas. Within the last two years Tanjin was found to be an SOE and to have been subsidized and causing harm to domestic pipe-makers and workers in cases brought under U.S. trade remedy laws and the WTO (“Famous Brands” WTO case). Thus, it would be possible for Tanjin to compete against our domestic pipe-makers with the advantage of government subsidies to finance and operate the facility and the provision of inputs from China at subsidized prices.

[lii] Concerns by some that recent U.S. government actions to bail-out U.S. banks and the U.S. auto industry might open such actions to investor-state disputes were this recommendation to be adopted lack merit. The actions the government took are temporary in nature (some companies have already paid back the funds) and are not designed to control operations or management and were taken to avert the total collapse of the U.S. and global economy. Stepping in with temporary measures to prevent the collapse of the largest banks and manufacturing sector (autos) – both of which put at grave risk the collapse of the entire economy -- is fundamentally very different than actions taken by governments that have ownership interests and control over SOEs and which assist such SOEs to compete by providing subsidies. For instance China has about half of its total productive capacity in the hands of SOEs and has a deliberate industrial policy to advance “pillar SOE industries” by use of a wide variety of government subsidization and intervention and control.

A collective statement from:
Stephen Canner, Vice President of Investment and Financial Services, U.S. Council for International Business
Jennifer Haworth McCandless, Partner, Sidley Austin LLP
Linda Menghetti, Vice President, Emergency Committee for American Trade

The Subcommittee Report to be considered at the full ACIEP meeting on September 30, 2009, identifies numerous issues regarding the U.S. Model BIT that were discussed by the Subcommittee over the past few months. The Report reflects both the issues on which there was consensus among Subcommittee members and issues on which no consensus could be reached. The Report, however, fails to capture the importance of a strong BIT program to U.S. investors and the U.S. economy. It also fails to identify priority issues for U.S. investors. We present those views below.

Foreign investment is vitally important to America’s economic and broader national interests. Ninety-five percent of the world’s consumers live outside the United States. In addition, 80 percent of the world’s purchasing power resides outside the United States. As such, U.S. industries across the economic spectrum of manufacturing, services, and agriculture, need to be fully engaged internationally to remain competitive.

As stated in a World Bank paper published this month, “Foreign direct investment (FDI) is the most important vehicle to bring goods and services to foreign markets.”[1] Multiple studies and experiences of U.S. companies demonstrate that U.S. companies that invest abroad:

  • export more, accounting for over 50 percent of U.S. exports – made by U.S. workers;
  • spend more on U.S. research and development performed by U.S. workers; and
  • pay their workers about 24 percent more on average than purely domestic companies.

Notably, the sales of foreign-invested affiliates of U.S. companies are about $4 trillion per year – more than double total U.S. exports – and 93 percent of those sales are made in foreign countries, not the United States.[2] In short, U.S. investment abroad is critical to continue to spur economic growth and a strong economic foundation here in the United States for the benefit of U.S. companies and workers.

More broadly, U.S. investment overseas helps promote the rule of law, improve economic development, reduce poverty, and provide greater stability. The importance of trade and investment at this critical time for the international economy was recognized by the leaders of the G-20 in their meeting in Pittsburgh last week; the G-20 leaders concluded that “[c]ontinuing the revival in world trade and investment is essential to restoring global growth.”

The U.S. BIT program, which has been strongly supported by Democratic and Republican Administrations and Congresses over nearly 30 years, is vital to promoting and protecting U.S. investment overseas. The investment protections in BITs (and the investment chapters of trade agreements) are based in substantial part on core principles of U.S. law, from the Takings, Equal Protection, and Due Process Clauses of the Constitution to the protection against arbitrary and capricious government action in the Administrative Procedures Act.

Strong BITs are more important than ever, as some countries, particularly in our own hemisphere, are turning their backs on basic international obligations and rules of fairness. As documented recently, investment protectionism “is on the rise.”[3] To ensure that U.S. investors and their investments overseas are well protected, it is critical that the United States negotiate and bring into force high quality BITs with strong investor protections. It is particularly critical that the United States negotiate such BITs with key countries, such as China, India, Russia and Brazil, where U.S. investors are seeking to invest. Already, our competitors benefit from much more extensive BIT networks than the United States. While the United States has 40 BITs and similar investment chapters in trade agreements with 15 more countries now in force, there are over 2,600 BITs around the world. Germany, China, Switzerland, the United Kingdom, and Egypt each have signed 100 or more BITs, and Italy, France, the Netherlands, Belgium, Luxembourg, and Korea all have signed more than 80 BITs.

Between 2001 and 2004, the U.S. government engaged in an extensive review of the previous 1994 Model BIT and considered many of the same issues discussed in the Subcommittee Report. After a few foreign investors filed cases against the United States under NAFTA, some sought to weaken investment protections provided under BITs and FTAs. Supporters of weakening BIT protections claimed that foreign investors might receive stronger protections under BITs and FTAs than under U.S. law or that BITs and FTAs somehow undermined a government’s right to regulate. Others claimed there would be a deluge of cases against the United States creating huge costs for the U.S. government and states and municipalities. None of these claims has materialized. The United States has been a defendant in relatively few cases (all under NAFTA) and, to date, has won every case it has defended. Thus, not only has there not been an onslaught of cases against the United States (in fact, overall, only some 50 cases have been filed under NAFTA – less than a third of the cases filed every year in U.S. courts on federal takings claims alone), but the United States has not had to change its regulatory activities as a result of investor cases brought against it.

Based on fear more than fact, the previous BIT review resulted in a substantial weakening of core protections for U.S. investors overseas. In particular, the 2004 Model BIT narrowed protections on fair and equitable treatment, full protection and security, and expropriation; broadened the essential security exception; and carved-out financial sector measures from the BIT’s disciplines in certain circumstances. For U.S. investors, this means that the current U.S. Model BIT provides weaker protections in these areas than the BITs of our major competitors. In some cases, the protections provided in the 2004 Model BIT are weaker than protections provided to foreign investors in the United States under U.S. law.

The U.S. Model BIT serves as our nation’s opening position in tough international negotiations. We should aim to negotiate strong protections for our investors, not weak ones. This is particularly true when our major international competitors already enjoy more and stronger BITs.

Against this background, the Subcommittee had the opportunity to reposition the United States’ BIT program and to advocate for more and higher-standard BITs. We and other Subcommittee members made several concrete proposals to strengthen the Model BIT, including:

  • Eliminating the use of customary international law as a limitation on the obligations of “fair and equitable treatment,” “full protection and security” and expropriation without compensation;
  • Clarifying that investor-state rights are guaranteed in the Model BIT for all claims of non-discrimination regardless of sector;
  • Clarifying and/or modifying the Model BIT to ensure that, like under U.S. law, the protection against uncompensated expropriation covers, among other things, all types of financial instruments;
  • Restoring the so-called umbrella clause in the Model BIT (i.e., the clause which provides that “each Party shall observe any obligation it may have entered into with regard to investments”); and
  • Narrowing and/or eliminating the self-judging nature of the essential security exception.

From our perspective, these are some of the most important modifications and clarifications that the Administration could make to strengthen the U.S. Model BIT, level the playing field for U.S. investors and workers, and strengthen the U.S. economy.

Several proposals made by other Subcommittee members in this report seek to include new substantive obligations in the Model BIT on labor, environment, and subsidies. Such provisions are inappropriate. Requiring substantive obligations in the U.S. Model BIT goes far beyond what a BIT can or should include. If such provisions were included in the U.S. Model BIT, it risks bringing the U.S. BIT program to a halt. This is because many foreign governments would never agree to include such provisions (which far exceed the traditional subjects addressed) in a BIT. Nor would they likely be willing to make the necessary changes to bring their laws into compliance with such obligations. This would put U.S. investors at a significant disadvantage, as governments of U.S. competitors would continue to negotiate BITs with strong investor protections while the U.S. BIT program would stop all together.

Other proposals, including those to weaken or eliminate investor-state dispute settlement or to create environmental or balance of payments exceptions to the BIT’s disciplines, would nullify BIT protections and undermine U.S. economic and job opportunities. It does not help America’s enterprises, workers or economy if the Model BIT is revised to weaken enforcement mechanisms or create other new exceptions to BIT protections. As the G-20 recognized in Pittsburgh, now is not the time to “retreat into financial protectionism, particularly measures that constrain capital flows, especially to developing countries.”

The United States needs a strong BIT program to promote economic growth and opportunities here in the United States and to promote the rule of law and economic development and stability overseas. To accomplish this goal, the United States should move quickly to strengthen – not weaken – the Model BIT and negotiate more high-quality BITs with key countries around the world.

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[1] Karl Sauvant, “FDI Protectionism Is on the Rise,” Policy Research Working Paper 5052, The World Bank at 1 (Sept. 2009).

[2]See, e.g., Investments, American Returns (GIAR) (1998 and 1999 Update), Matthew Slaughter, Published by Emergency Committee for American Trade; U.S. Multinational Companies: Operations in 2006, Raymond J. Mataloni, Jr., BEA (Nov. 2008); How U.S. Multinational Companies Strengthen the U.S. Economy (2009), Matthew Slaughter, Published by Business Roundtable and United States Council Foundation.

[3] Sauvant, supra note 1.

Shaun Donnelly, Senior Director for International Business Policy, National Association of Manufacturers

I very much appreciate the opportunity to participate in the Model BIT Subcommittee. I am proud to represent the National Association of Manufacturers, “the NAM”, our nation’s largest industrial trade association and the voice for small and large manufacturers in every industrial sector and in all fifty states. I thank the two co-chairs of the Subcommittee and, indeed, all my fellow Subcommittee members for the careful, balanced, and fair approach they all have brought to some tough and controversial issues.

I came to the NAM a year ago from 36-year career as a U.S. Foreign Service Officer. Serving as an American diplomat (Economic/Commercial Officer, Deputy Ambassador, and Ambassador) in U.S. embassies in six developing countries across Africa, the Middle East, and South Asia, I have seen first hand how American investment overseas can be good for the U.S. and for our partner countries. I’ve seen how successful investments overseas pull along U.S. exports and create good jobs back at home. I have seen the foreign competition our U.S. manufacturers, small and large, confront for the best investment opportunities overseas. I’ve seen that economic development, higher living standards, and poverty reduction comes overwhelmingly from on-the-ground investments in physical and human capital much more than from vague political debate over “policy space” or “technology transfers.” I’ve also seen American investors fall victim to unfair treatment from local regulators and courts. I’ve seen how U.S. Bilateral Investment Treaties (BITs) and parallel investment chapters in FTAs can open foreign investment markets, level the playing field, and give our investors much-needed protections. Unfortunately in recent years, I’ve also seen the U.S. fall behind our European, Asian, and other industrial competitors in terms of the extent and the quality of our BIT programs.

The key reality reflected very clearly in our twenty-four page Subcommittee report is that our group was divided on the most fundamental question. Some members of the Subcommittee believe that BITs, while not perfect, are very good for the U.S. economy – for our companies, our share-holders, our workers, our federal, state and local governments. BITs also promote rule-of-law and transparency. For this group, the fundamental questions are how to strengthen, extend, and reinvigorate our BIT program. But others on the subcommittee believe BITs have been bad for the U.S. economy and have, thus, sought to narrow, restrict, and/or effectively shut down the BIT program. I am a strong advocate for the former views and believe the facts clearly support that view.

Our vigorous Subcommittee debate (while substantive, collegial, and respectful) has reflected these quite different fundamental political orientations, severely limiting the scope for consensus on the core issues. From one side came concrete proposals to strengthen the U.S. Model BIT, including correcting some unfortunate revisions made in the 2004 Model BIT policy review. In a competitive global economy, it is essential to restore the full protections to the U.S. BITs and match or exceed the protections in our competitors’ BIT programs. From the anti-BIT members of the Subcommittee came aggressive, sometimes inconsistent, proposals both to cut back the extent and depth of protections for U.S. investors and also to overload our U.S. BITs with legally binding provisions on politically sensitive topics such as labor and environment. It is my professional judgment, shared, I believe, by other members of the subcommittee, that were the recommendations to add inflexible, legally binding labor and environment provisions to the U.S. BIT program, most of our priority negotiating partners would refuse to negotiate on such a Model text. None of our key investment competitors seeks or obtains such provisions in their BIT programs nor has any plans to do so.

The fundamental question whether BITs are good or bad for the U.S. economy is not really addressed in our report. Indeed that question was not really on the specific agenda the Administration gave our Subcommittee. But beyond our policy debates, I think the facts and the data are clear. As was laid out in our NAM oral and written comments to the interagency public comment process in late July, as well as in the recent analytical work of Professor Matthew Slaughter of the Tuck School of Business at Dartmouth, the data is clear that international investment is a net positive contributor to the U.S. economy. I urge key agencies to review the statistical analysis in the annex to the NAM written comments on the Model BIT (July 31, 2009) as well as Dr. Slaughter’s Spring 2009 Study “How U.S. Multinational Companies Strengthen the U.S. Economy.”

And a strong BIT program is clearly one of the important programs the U.S. Government can undertake to support high quality U.S. investments overseas, especially in the current global economy where our industrial competitors have stronger and in many cases more extensive BIT programs than the U.S. We need to be strengthening and reinvigorating our BIT program, closing that BIT gap, not getting lured off into unrealistic, unilateral initiatives which effectively take our BIT program, and too often U.S. investors, out of the competitive game.

I am particularly anxious to see the U.S. achieve strong, market-opening BIT agreements with large emerging markets such as China, India, Russia, Brazil, and Vietnam. Let’s not kid ourselves; none of these negotiations will be easy or quick. But, today in many of these key markets our investors are at a competitive disadvantage.

For me, some of the key elements of a successful BIT program include;

  • Strong Investor/State Dispute Settlement provisions are essential.
  • U.S. BITs must continue to have a strong “market access” or pre-establishment elements.
  • The unfortunate 2004 narrowing of protections on “fair and equitable treatment”, “full protection and security”, “expropriation” and other provisions needs to be corrected to restore U.S. parity with key competitors’ BITs.
  • We need an aggressive BIT negotiating program with strong support from top levels from all relevant agencies and the White House.

Finally I just want to mention two modest proposals which, drawing on my long U.S. Government experience at the State Department and USTR, I made later in the Subcommittee process but which we understandably never really had an opportunity to discuss in detail. I simply urge the U.S. Government to increase its outreach efforts on the BIT program to key stakeholders, especially small and medium-sized U.S. companies and those without Washington offices or in-house investment policy expertise. I also suggest U.S. embassies and consulates could be used more effectively and proactively to brief resident U.S. businesses and prospective investors on current or future BIT protections. I would be happy to discuss these ideas with interested agencies.

Sean Heather, Executive Director - International Division, U.S. Chamber of Commerce

The U.S. Chamber of Commerce is grateful to have been asked by the Administration to serve on the ACIEP subcommittee that reviewed the Model BIT. We would also like to thank the chairs of the subcommittee, Al Larson and Thea Lee, for their work and leadership as well as recognize our fellow subcommittee members for their contributions to what proved to be a spirited debate.

The final report represents an attempt to bridge a gap that ultimately proved to be too significant given the fundamental differences in opinion held by members of the subcommittee. Those of us who believe in the importance of protecting U.S. investment abroad and understand its significance to our nation’s economic competitiveness in the global economy were met with the misguided belief that safeguarding U.S. investment abroad leads to the offshoring of jobs, contributes to the degradation of the environment, and unfairly restricts government action.

The evidence against these arguments is clear. Seventy percent of U.S. investment abroad is in developed countries where labor and environmental standards are comparable to the United States, and academic studies have shown that 93% of production abroad stays abroad. In other words, foreign affiliates of U.S. multinationals have a relatively low propensity to export to the U.S. market. Additionally, the U.S. government has never lost a BIT case, nor was it hampered by BIT commitments when it was forced to take unprecedented action during the financial crisis.

The Chamber believes that pursuing strong, high quality BITs that achieve a high standard of protection for investors is central to our international competitiveness. With some 2,676 international investment instruments in force worldwide, the U.S. is only party to 47. Many of the BITs negotiated between other countries include greater protections for investors of those countries than does our Model BIT. Therefore, the Chamber welcomed the Administration’s review and hopes that it will be used to strengthen the position of U.S. investors competing in foreign markets.

The Chamber highlights the following:

  • The Administration should quickly complete its review of the Model BIT and begin to aggressively pursue and launch BIT negotiations with key trading partners.
  • The last review of the Model BIT resulted in changes that eroded protections for U.S. investors; changes as a result of this review must not further erode investor protections, but must instead strengthen them.
  • BITs by design have the singular purpose of protecting investment by the private sector from actions by governments that unfairly and adversely impact that investment.
  • Conversely, BITs aren’t designed nor should they be used to achieve other important objectives such as raising labor and environmental standards, which are the ambit of other international institutions and agreements.
  • It is important to also note that BITs allow governments to take any regulatory action; however, actions that discriminate inappropriately against foreign investors require compensation.
  • The investor-state dispute mechanism is central to a BIT; without it there is no ability to enforce a BIT.
  • The Chamber notes its concerns with the current Model and the insufficient minimum standard of treatment that is afforded as well as the reliance on customary international law.
  • The Chamber believes that the Model BIT and future BIT negotiations need to better address the essential security exception to limit its use as a defense by governments to legitimate security concerns.
  • We would also highlight our support for several recommendations found in this report (#5, #7), including greater transparency and access to the standards setting process in foreign countries, as well as greater protections for intellectual property rights.

Finally, the Chamber notes the specific interest by the Administration to examine the Model BIT and how it disciplines state-owned enterprises and national champions. The subcommittee report represents only an initial examination of what has proven to be a difficult and complicated issue. The Chamber supports the SOE-related recommendations and has plans to continue to provide thought leadership on this issue going forward.

The Chamber’s views on the Model BIT and important improvements to future BITs can be read in greater detail in its written statement, which was provided in response to the Federal Register notice and the hearing conducted on July 31, 2009.

Toni Hennike, Coordinator - International Investments & Arbitration Law Department, Exxon Mobil

I endorse the Additional Views submitted by Scott Miller and Laura Lane, and build upon their comments from the perspective of U.S. headquartered companies in the oil & gas industry (producers, services companies, pipeline companies, seismic companies, refiners, plant owners, etc).

Strong BITs are particularly important in the oil & gas industry where investments in the billions of dollars are not uncommon and where the life of an investment can be 30 years or more. U.S. investors in overseas oil & gas projects have two main concerns regarding the United States’ BIT program. First, as pointed out by other commentators, the protections offered in the current U.S. Model BIT are often weaker than those found in the BITs of other countries. Second, other countries, in particular European countries, have signed BITs with many more hydrocarbon producing countries than has the United States. This leaves U.S. headquartered companies at a competitive disadvantage vis-à-vis their foreign competitors when investing in these countries. Changes to the U.S. Model BIT that make it more difficult for the United States to negotiate new BITs will only exacerbate this situation. Below are three tables which illustrate the point. The first table lists the top oil exporting countries to the United States and compares the BITs between these countries and United States versus four European countries. The second table is a list of the countries that export LNG or natural gas to the United States with the same comparison. The third table makes the same comparison for other countries that receive foreign investment in their hydrocarbon sector.

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.
CRUDE OIL EXPORTING COUNTRIES TO THE UNITED STATES--BITs IN PLACE
Top Oil Exporting Countries US UK Netherlands Germany France
Canada NAFTA
Venezuela X X X X
Mexico NAFTA• X X X X
Saudia Arabia X X X
Nigeria X X X X
Angola X*
Iraq
Russia X X X X
Colombia X*
Brazil X* X* X* X*
Algeria X* X X
Kuwait X X X
United Kingdom N/A + + +
Ecuador X X X X
Norway +* +* +* +*
* Not in Force
+ Energy Charter Treaty
• Hydrocarbon sector excluded for Mexico

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.
COUNTRIES EXPORTING LNG AND NATURAL GAS TO UNITED STATES--BITs IN PLACE
Top Oil Exporting Countries US UK Netherlands Germany France
Canada NAFTA
Trinidad & Tobago X X* X
Egypt X X X* X
Nigeria X X X X
Algeria X X X
Qatar X X
Equatorial Guinea X
* Not in Force

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.
COUNTRIES WITH FOREIGN INVESTMENT IN THE HYDROCARBON SECTOR^--BITs IN PLACE
Top Oil Exporting Countries US UK Netherlands Germany France
Argentina X X X X X
Azerbaijan X X+ + X+ X+
Bolivia X X X X X
Brunei X
Chad X X*
China X X X*
Egypt X X X X X
Hungary X+ X+ X+ X+
India X X X X
Indonesia X X X
Kazakhstan X X+ X+ X+ X+
Libya X* X
Madagascar X* X
Malaysia X X X X
Mozambique X X X X* X
Papua New Guinea X X
Peru X X X X
Philippines X X X X
Poland X X+ X+ X+ X+
Romania X X+ X+ X+ X+
Tanzania
Turkey X X+ X+ X+ X+
Tunisia X X X X X
United Arab Emirates X X X
Ukraine X + X+ + X+
Vietnam X* X X X
Yemen X X X X
^ Not a complete List
* Not in Force
+ Energy Charter Treaty

Mark Kantor, Washington, D.C.

I support (A) the extension in the U.S. Model BIT of independent and neutral State-State dispute resolution to labor and environmental disputes along the line of the U.S.-Peru TPA and (B) the recommendations in the Report that the U.S. (i) confirm that investments by non-profit organizations are protected under U.S. BITs, even in the absence of a profit motive, and (ii) ensure that non-profit and media enterprises are aware that existing BIT commitments (e.g., compensation for expropriation, fair & equitable treatment, full protection & security and no denial of justice) can in many cases be employed to protect against improper conduct by host States infringing freedom of association, speech and the press. Additionally, the U.S. should take specific steps to control the expense of investment arbitration, including BIT provisions to avoid delay and expedite the proceedings, consistent with due process.

I recommend substantially increased accountability for use of the “essential security interests” exception in the BIT, based on the recent OECD Guidance for Recipient Country Investment Policies relating to National Security. The OECD Guidance limits reliance on such exceptions to a “last resort” and then only when consistent with principles of non-discrimination, transparency and predictability, regulatory proportionality and accountability. The BIT should not permit countries to engage in uncompensated nationalizations and regulatory misconduct by misusing the “essential security interests” exception.

With respect to investment arbitration generally, the following “hard-to-quarrel-with” facts seriously undermine arguments that “exhaustion of local remedies” should be required, that additional barriers to arbitration should generally be imposed, that existing substantive investment protections should be diluted, or that the arbitral process is biased in favor of investors.

1. Claims have been filed against the U.S. in a total of 15 investment arbitrations.[1] All claims against the U.S. under NAFTA Chapter 11 but one have been filed by Canadian investors. All claims under NAFTA Chapter 11 against Canada have been brought by U.S. investors. No claims have ever been brought against the U.S. or Canada under any BIT or FTA other than NAFTA. The impact of investment arbitration on U.S. and Canadian regulatory conduct has been a bilateral issue between the U.S. and Canada.

2. The U.S. has never lost an investment treaty claim. The U.S. has prevailed in all six cases that have come to final decision. Those results undercut the credibility of allegations that international investment law somehow protects foreign investors more than U.S. domestic law or that international investment law overly restricts the U.S. Government’s “regulatory space.”

3. The most thorough and neutral study of the results of investment arbitration is by Prof. Franck, “Empirically Evaluating Claims about Investment Treaty Arbitration,” 86 N. Car. L. Rev. 1 (2007). Prof. Franck reviewed every single known investment treaty case up to June 2006 (including both ICSID cases and ad hoc UNCITRAL cases).[2] Based on the list of States in Annex 1 to Prof. Franck’s article, about 76% of the investment treaty arbitration cases in which awards were rendered up to June 2006 involved States that fall at or below #50 on Transparency International’s 2008 Corruption Perception Index (about 84% if we exclude cases involving the U.S. and Canada). Over 69% involve States at or below #70 (again, higher if we exclude the U.S. and Canada). About 68% of those States are in the bottom 60% of the World Bank’s Worldwide Governance Indicators (WGI) index for “rule of law.” Imposing a procedural requirement on U.S. companies to exhaust their remedies in such countries is unfair.[3]

4. The out-of-pocket costs of creating additional procedural delays to investment arbitration claims, such as an “exhaustion of local remedies” requirement, are very large and are borne almost entirely by investors. The cost of paying interest on money borrowed to finance the project at issue in the investor-State dispute will be far larger than the litigation costs, which are themselves substantial. Assume hypothetically that (i) an investment project borrowed $500 million from lenders (roughly the debt portion of a medium-sized gas-fired power plant), (ii) the lenders charged 10% interest per annum, (iii) the interest is payable only annually and (iv) no principal amortization occurs until loan repayment.[4] If the host State expropriated the project immediately before completion of its construction, just the additional interest amount the project will pay to its lenders as a result of the delay caused by an “exhaustion of local remedies” requirement will be $50 million per year. If the project must first litigate for three years in local courts[5] to exhaust its remedies before commencing investment arbitration, then the out-of-pocket cost to the project of paying interest to its lenders for that additional three years will be $150 million. The investors will absorb that cost, subject only to the hope of compensation at the end of the arbitration years later.

5. Prof. Franck calculated in her 2007 article that respondent States paid nothing in 57.7% of the cases where final decisions were reached up to June 2006. In the 38.5% of the cases that investors “won” during that period,[6] successful claimants received an average of 3% of their claimed sums (an average of $10.4 million awarded when sums claimed by investors averaged $343.4 million). ICSID results and recoveries in 2007-2008 also show that the process does not unduly favor investors. For ICSID cases (i.e., not including the harder-to-find ad hoc cases under UNCITRAL Rules), Global Financial Analytics has determined:

“The sixteen publicly available awards [in 2008] resulted in seven awards in favor of the claimants and nine respondent victories. If we add to that total the two undisclosed awards, both in favor of claimants, we have an even split in the 2008 awards. Claimants were successful in obtaining something in exactly half of the matters.

The quantum of recovery, however, was considerably less than in prior years. In our initial presentation of historic recoveries through 2006, presented at the spring 2007 meeting of the Section of International Law of the American Bar Association, we noted that in awards in which the claimant was successful, the average recovery was about one-third of the amount claimed. Our update at the end of 2007 noted similar recovery results. We saw claimants’ recoveries drop to 18.6% of the amounts claimed in 2008.”[7]

6. The bottom line, as Prof. Franck wrote earlier this year: “Ultimately, the data suggest that investors and governments won and lost in relatively equal measure, but governments won a bit more. While the data show also that, when they did win, investors ended up with substantially less than they requested. Moreover, the data do not establish that a respondent’s development status was a reason why investors or governments were successful in pursuing arbitration. This suggests that why a party wins or loses arbitration may ultimately have more to do with factors other than development, such as the merits of a particular claim or defense. (emphasis added)

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[1] Treating the 107 identical BSE Border Closing claims as a single case. The Mexican company CEMEX just filed a Notice of Intent under NAFTA Chapter 11. If pursued, that will be the second NAFTA claim by a Mexican company against the U.S. in 15 ¾ years.

[2] Prof. Franck is in the process of updating her database to include awards subsequent to June 2006, but that work is not yet completed. An additional study just published by Prof. Franck is “Development and Outcomes of Investment Treaty Arbitration,” 50 Harv. Int. L. J. 201 (2009). The study concludes that development status has no impact on a case’s outcome.

[3] The problem occurs for prospective treaty partners as well. For example, the U.S. Commerce Department Country Commercial Guide for Vietnam reports that “[m]any international investors express concerns about the ability of the court system to render impartially and promptly a decision that accurately reflects the facts and properly interprets the relevant Vietnamese law and/or international law and practice.” The U.S. Commerce Department Country Commercial Guide for China says: “Foreign firms report inconsistent results with all of China’s dispute settlement mechanisms, none of which are independent of the government. The government often intervenes in disputes. Corruption may also influence local court decisions and local officials may disregard the judgments of domestic courts. Well-connected local business people are often in a better position to win court cases than are foreign investors and it is possible that they may use their connections to avoid prosecution for taking illegal actions against their former foreign partners. China’s legal system rarely enforces foreign court judgments.”

[4] All of these are artificial assumptions. The purpose of this example is just to show a ballpark number.

[5] Illustratively, the Delhi High Court recently asked trial courts in Delhi to resolve claims before them in three years, not including appellate procedures, retrials, etc. One article concluded that the median time to disposition within civil jurisdiction in Venezuela in 2006 was probably 4.8 years. Another study found that the average commercial case takes almost eight years to verdict in Ecuador.

[6] The 3.8% gap between 57.7% and 38.5% is explained by an award embodying an agreed settlement.

[7] Report available at http://www.gfa-llc.com/practiceareas.html. Footnote omitted.

A collective statement from:
L
aura Lane, Senior Vice President of International Government Affairs, Citigroup
Scott Miller, Director of Global Trade Policy, Procter & Gamble

As U.S. headquartered companies competing in an increasingly globalized economy, we strongly support the U.S. BIT program as a key tool to promote U.S. competitiveness and open new international markets that are vital to providing much-needed new economic opportunities for U.S. companies and our workers.

With 95 percent of the world’s consumers and nearly 80 percent of world purchasing power outside the United States, U.S. companies need to be globally engaged to grow our businesses, innovate and spur productivity, and support job growth here in the United States.

BITs provide very real benefits for U.S. companies and their U.S. workers:

  • BITs enable manufacturers and agricultural producers to establish a local presence to market, service, adapt and distribute their products. Overseas investments not only increase sales in foreign markets, they help promote greater U.S. exports: Nearly 20 percent of all U.S. exports go to U.S. foreign subsidiaries worldwide and U.S. parent companies that invest overseas are responsible for 51 percent of total U.S. exports.
  • BITs enable U.S. service providers to establish local offices in the foreign markets where they operate. From information and telecommunications services to audio-visual, distribution and financial services, the highly competitive U.S. service sectors need investments in foreign countries to compete effectively with rivals from other parts of the world and to provide services directly to foreign consumers through branch and affiliate offices.
  • BITs enable U.S. retailers to open new stores in different markets, which provides enormous opportunities for many U.S. manufacturers not only to export products to sell in these overseas stores, but also provide many of the materials used to build and operate the store, from shelving and air-conditioning units to shopping carts.
  • BITs help establish predictable, fair and non-discriminatory rules for U.S. firms operating overseas.
  • BITs help ensure that U.S. firms are provided with an objective and fair forum to address unfair and detrimental government actions.
  • BITs can better ensure the security and long-term viability of U.S. foreign investments, particularly those that are critical not only for U.S. companies, but also for broader national U.S. interests, such as developing stable sources of energy supplies, accessing scarce resources and continuing the United States’ leadership in creating new and advanced technologies.

In the highly competitive international economy, it is important to ensure that U.S. companies have a level playing field. Unfortunately, many of our competitors in Europe, Asia and elsewhere benefit from the much stronger BIT network that their home countries have established. Germany, the United Kingdom, Japan and Korea all have many more BITs and investment instruments than the United States, providing their companies stronger rules and protections, including in key growth markets where the United States needs to compete. And many of these other BITs provide stronger and more definitive protections than are now found in the 2004 Model BIT. With only 55 BITs and investment instruments in force, the United States is behind the curve.

For the United States to succeed in the international economy, particularly in the wake of the financial crisis, U.S. leadership is needed now, more than ever, to promote a stronger international-investment climate for U.S. investors. To do so, it is important for the United States to conclude the Model BIT review expeditiously and in a manner that maintains and strengthens core investor protections and binding international dispute settlement. Particularly in light of the recent financial crisis, it is critical that the United States be negotiating BITS that provide enforceable non-discriminatory treatment of U.S. investment overseas, covering all industry sectors including financial services, to safeguard against governmental protectionist actions, despite the G20 entreaties against them. Moreover, the Model 2004 BIT provisions that provide exceptions for government actions should not be changed in such a way as to diminish investor protections, as the crisis has shown that governments, including the U.S. government, had sufficient flexibility under existing BIT obligations, consistent with the 2004 Model BIT, to respond to the crisis. Finally and most importantly, the United States should reinvigorate its BIT program as soon as possible, negotiating and concluding high standard BITs with China, India, and other key countries that offer growth opportunities for our companies going forward.

Alan Larson (Co-Chair), Senior International Policy Advisor, Covington & Burling, LLP

I want to thank my Co-chair Thea Lee and the members of the Subcommittee. They gave generously of their time, expertise and ideas. In this space, I offer personal observations – as an economist, former diplomat and an advisor to international investors – on the vital importance of international investment and the BIT program to the United States.

As an economist, I see that international investment now makes a crucial contribution to the prosperity of the United States. Its importance will grow in the future. International investment in the United States puts foreign capital to work in our country by raising output, creating jobs and financing our budget and trade deficits. U.S. investments abroad increase our nation’s access to critical resources and essential export markets.

As a diplomat, I saw how international investment promotes social and environmental objectives, not just economic ones. A successful response to climate change, for example, will require massive flows of international investment in clean and renewable forms of energy. In my diplomatic experience, American investors abroad carry with them high standards of environmental protection and treatment of workers.

As an adviser to international investors, I know that BITs provide a necessary rule of law framework for international investment through the reciprocal exchange of benefits and obligations. The United States enters into such agreements because it is in our interest to do so. In particular, the United States benefits from the rigorous dispute settlement provisions of BITs, both investor-state and state-to-state. The investor-state mechanism provides a depoliticized forum for resolving disputes. With some of our BIT partners, investor-state dispute settlement is the only viable tool American businesses can use to protect multi-billion dollar investments in those foreign markets. I have seen firsthand how proposals that delay, complicate or raise the cost of resorting to investor-state would impose grave damage on U.S. business and U.S. workers.

One common criticism of the BIT program is that it affords foreign investors with greater rights than those provided to domestic investors in the U.S. In reality, the protections offered to foreign investors under BITs are broadly comparable to those offered domestically (and available to foreign investors) under U.S. law. U.S. authorities and U.S. citizens have little to fear from investor-state dispute settlement. For foreign investors in our country, our well-functioning domestic court system has been the forum of choice for resolving many disputes. In the relatively small number of cases where investors have filed dispute settlement cases against the United States, the Department of State has an exceptionally strong track recording in defending the actions of U.S. authorities.

For all these reasons, I support provisions that make the BIT enforceable and I do not generally support measures that would weaken protections under investor-state and state-to-state dispute settlement. In addition, these dispute settlement provisions have, in my view, very positive environmental benefits in a world where international investments in clean energy and carbon-mitigating activities will make an indispensable contribution to combating global environmental threats such as global climate change.

U.S. authorities asked our Subcommittee to give special attention to the financial services sector. Our investigations and deliberations suggested that the financial service sector should benefit from the full range of BIT protections, including with respect to national treatment, most favored nation treatment and expropriation. I saw no sign that BITs impair authorities’ ability to protect the safety and soundness of the U.S. financial sector.

U.S. authorities also asked us to examine issues related to state-owned enterprises (SOEs). Our recommendations, together with the framework established by the Foreign Investment and National Security Act of 2007, provide the appropriate policy tools.

I advocate careful steps to broaden and strengthen BIT disciplines and dispute settlement. I suggest the Administration consider obligations, subject to dispute settlement, requiring that a party enforce its labor and environmental laws. The approach used in the U.S.-Peru Free Trade Agreement is worth exploring.

I also advocate exploring strengthened transparency commitments within the BIT, along the lines highlighted in our report. Such a step would be of great value to U.S. investors abroad, and it also would promote a key dimension of good governance.

I recommend the Administration explore other ways in which the Model BIT could advance climate policy goals. Clearly, BIT protections for international investments in clean and low carbon energy can advance environmental goals. If the emerging U.S. climate policy involves participation in the Clean Development Mechanism or opens opportunities for U.S. firms to participate in international offset programs, the Administration should ensure that contracts relating to such transactions could benefit from BIT protections when such contracts have the character of an investment.

Investment treaties benefit investors. I do not believe they have done so at the expense of labor and environmental interests, but there is more they can do to advance those interests. The environmental interests of the United States are not threatened by strong enforceable BITs. Rather, at a time when we face grave environmental threats that require global solutions, our environmental interests can be advanced by thoughtfully crafted and enforceable international investment agreements.

Structured properly, BITs can be a vital part of the rule of law framework that supports U.S. prosperity and advances U.S. values, including labor rights and environmental protection. It is important that the Administration conclude twenty-first century BITs with countries, such as China and India, where negotiations are underway. The suggestions in this report highlight ways that BITs can provide strong protection for investments, investors, workers and the environment.

Judge Stephen Schwebel, Independent Arbitrator and Counsel

For more than 150 years, the United States strongly espoused the protection of foreign investment. That position was constructively developed by the terms of the 1994 U.S. Model BIT. However the United States sharply modified its traditional position with the advent of NAFTA, not by the terms of that Treaty but by interpretation of it and by the positions it took in cases brought by Canadian investors against the U.S. Government. The United States made the remarkable discovery that treaty obligations run in more than one direction; foreign investors could take advantage of U.S. obligations just as U.S. investors could invoke the BIT obligations of other States. That led the United States to shift to a “defensive posture” emphasizing restrictions upon the viability of foreign investment rather than its protection, both by the terms of the 2004 Model BIT and in the litigious positions its took in NAFTA cases (such as Glamis Gold) In my view, this shift was, and remains, ill advised.

The standards for the protection of foreign investment found in the 1994 U.S. Model BIT are substantially those found in the some 2800 BITs concluded the world over. The salient – and profoundly misguided – change in those standards embodied in the 2004 BIT is its substitution of customary international law for those standards.

What is the customary international law that governs the treatment and taking of foreign investment? That question was at the heart of United Nations debates over “Permanent Sovereignty over Natural Resources,” the “New International Economic Order,” and the “Charter of Economic Rights and Duties of States”. The resolutions adopted on those questions demonstrate that, while in the view of the industrialized democracies, there is a customary international law in this sphere – whose core provides for prompt, adequate and effective compensation for expropriated foreign property – in the view of the very large majority of UN Members no such customary international law exists. In their view, a State is free to treat foreign investment as its law and policy dictates without regard to alleged international obligations of which there are none.

Far from relying on a customary international whose existence, not to speak of its content, is contentious, the United States will do far better to rely on the terms of BITs, such as its Model 1994 BIT, which vault over this traditional divide of the international community and provide specific, progressive terms for the treatment and taking of foreign investment.