Emergency Committee For American Trade - Publications

SECTION 6: INVESTMENT

Due to global economic integration, the livelihood of more workers in more companies around the globe depends on cross-border trade and investment than ever before. Over the last quarter century, expanding foreign direct investment has become an increasingly important catalyst of global economic integration and new economic growth and opportunity. According to the most recent statistics, global foreign direct investment rose phenomenally in the last three decades, from $14 billion to $530 billion between 1970 and 2003. While the past three years have seen declines in foreign investment, from a high of $1.5 trillion in 2000 to $735 billion in 2001, $651 billion in 2002 and $530 billion in 2003, these declines appear largely due to a slowing down of the global economy, a decline in cross-border mergers and acquisitions and other factors. Most of this reduction was in investment flows to developed countries, particularly the United States and the United Kingdom, as well as to Central and Eastern Europe.

Foreign investment, both inward and outward, is of substantial importance to the American economy. It spurs U.S. productivity by promoting research and development, investment in physical capital, and new technology. The payoff is in higher-paying jobs and a higher standard of living in the United States.

Foreign investment in the United States is a major source of U.S. economic growth. Until 2001, the United States was the largest recipient of foreign investment, receiving $143 billion in foreign direct investment in 2001 according to statistics of the United Nations Conference on Trade and Development (UNCTAD). In 2003, however, foreign direct investment in the United States declined to $30 billion. Foreign investment in the United States promotes U.S. exports, increased employment and productivity. Based on the most recent data from the Bureau of Economic Analysis, majority-owned U.S. affiliates of foreign companies with operations in the United States employed 5.4 million U.S. workers in 2002, accounting for nearly 5 percent of total U.S. employment in private industries. The Organization for International Investment reports that 6.4 million U.S. workers are employed by U.S. subsidiaries of foreign companies. As well, a significant portion of profits is typically reinvested in the United States. It is vital that U.S. trade and international tax policies keep in step with the growing importance of U.S. inward and foreign direct investment in order to support U.S. economic growth and living standards.

UNCTAD reports that outflows of U.S. foreign investment equaled close to $120 billion in 2002, which represents an increase from 2001 outflows of 104 billion, but a decline from 1999 and 2000 outflows of $209 and $143 billion, respectively.

In its 2001 report on FDI in Least Developed Countries at a Glance, UNCTAD emphasized that increased foreign direct investment is of “particular importance” to achieve sustainable poverty-reducing growth and development in the poorest countries. Strong investor protections in developing countries are also critical to foster the rule of law, to reduce corruption and build institutions, to promote respect for and the protection of private property and contract rights, and to create a regulatory environment hospitable to capital formation in general and international investment in particular. Without these protections, foreign investment will simply not flow to the developing countries that need it most. Several studies have also emphasized the importance of educating the workforce and other ways to develop capacity to promote a greater influx of foreign investment. Foreign investment and investment protections also promote transparency and a market-based free enterprise system. Foreign investment also serves as a model in many countries for improved workers conditions and environmental practices, as well as respect for labor rights.

Importance of Foreign Investment for the U.S. Economy

U.S. investment overseas, which depends on strong investment protections, is critical for supporting U.S. economic growth. Over the past 20 years, U.S. companies that invest abroad have:

exported more (accounting for ˝ to ľ of all U.S. exports)

expended more on U.S. research and development and physical capital investments, and

paid their U.S. workers more

than companies not engaged globally. Foreign affiliate sales of U.S. companies invested abroad amount to approximately $2 trillion, which help to support jobs and business activities in the United States. More than 70 percent of the profits earned by such affiliates are returned to the United States. In short, these investment protections support U.S. foreign investment that, in turn, complements U.S. business activity, supporting higher paying U.S. jobs, greater productivity, a higher standard of living and economic growth in the United States.

An UNCTAD study, Bilateral Investment Treaties 1959-1999, documents another important trend in investment: the rapid increase in the number of bilateral investment treaties concluded during the 1990s. In particular, UNCTAD found that the number of treaties almost quintupled during the last decade, rising from 385 at the end of the 1980s to 1,857 at the end of the 1990s. The UNCTAD report also noted that there has been an enormous increase in treaties concluded by developing countries and Central and Eastern European countries, rising from 63 at the end of the 1980s to 833 at the end of 1999. The United States, however, ranks only 26th in the number of bilateral investment treaties that it had concluded by the end of 1999. Since that time, the United States has negotiated one new bilateral investment treaty with Uruguay and has included very similar provisions in investment chapters in Free Trade Agreements with Chile and Singapore, Morocco, and Central America and the Dominican Republic.

ECAT Studies and the Importance of International Investment to the U.S. Economy

In 1998, ECAT released its study, Global Investments, American Returns (GIAR), of U.S. foreign direct investment in the agricultural, manufacturing, and services sector. This study was updated in 1999. Both the original study and the 1999 Update documented some key findings about the impact of foreign investment on the United States and its workers, including:

American companies with global operations make important contributions to the U.S. standard of living that in many cases are greater than those of purely domestic firms. For the last 20 years, American companies with global operations have accounted for over half of U.S. research and development, capital investments, and exports and, thereby, have helped boost overall U.S. productivity.
U.S. foreign direct investment complements economic activity here at home, thereby increasing the U.S. standard of living. Foreign affiliate activity generates purchases from U.S. suppliers, U.S. research and development, and trade. Given that the U.S. and foreign activities of American companies tend to complement one another, the ability of these companies to raise the U.S. standard of living depends on their ability to invest abroad. Restrictions on foreign investment, which prevent U.S. companies from expanding abroad, generally reduce U.S. parent activity and, thus, lower the U.S. standard of living.
American companies with global operations depend upon American suppliers and their American workers. For the last two decades, the U.S. parents of American companies with global operations consistently have purchased more than 90 percent of their supplies (or intermediate inputs) from U.S.-based, not foreign, suppliers.

In addition to these key findings, the GIAR study and 1999 Update also noted that American firms with global operations pay higher wages than purely domestic firms. For non-production or white-collar workers the wage difference is nearly 10 percent, and for production or blue-collar workers it is even higher.

Based on data from the Bureau of Economic Analysis, U.S. companies with global operations employed 30.6 million workers worldwide in 2002, of which over 73 percent (22.4 million) were employed in the United States, accounting for one-fifth of total U.S. employment in the United States.

In January 2003, ECAT released Mainstay IV: Technology, Trade and Investment: The Public Opinion Disconnect. This study, as detailed in more depth in section 1, documents that trade and investment are critical components supporting the growth in productivity and the increase in U.S. living standards that the United States has enjoyed over the last decade. This study examines in particular the relationship between trade and investment and the growth in the production and in the use of information and communication technology (ICT) products – products that have together accounted for about two-thirds of the acceleration in U.S. labor productivity over this period. This acceleration has been much celebrated, as labor productivity is often considered to be the single best measure of a country’s overall standard of living. The faster growth rate of recent years implies that U.S. living standards now double in only 28 years – a generation faster than the previous growth rate.

The study examines the role of both ICT-producing and ICT-consuming industries in supporting the acceleration in U.S. productivity. ICT-producing industries have high levels of exports, imports and foreign investment and are much more trade intensive than is the overall U.S. economy. Much of their output entails multiple production stages across multiple countries, all linked via trade and investment. Exports are important not just for the U.S. parents, but also for their foreign affiliates. The acceleration in quality improvements and price declines in many ICT products is related to key liberalizations in the WTO and elsewhere, including the 1995 Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs), the 1997 Information Technology Agreement and the 1997 Basic Telecommunications Agreement.

ICT-consuming industries² -- those industries that use ICT¹ more heavily – are also industries that export more as a share of total output and, for decades, have had higher exports, imports and total trade as a share of total sales. Global production networks have deepened and widened in key ICT industries. Two of the most intensive ICT-using industries – telecommunications and financial services – have benefited from trade and investment liberalization in the WTO and elsewhere, including the 1997 Basic Telecommunications Agreement and the 1997 Financial Services Agreement.

The key conclusion of Mainstay IV is that trade and investment play a critical role in fostering the growth of and the demand for ICT in ways that support increased productivity and economic growth in the United States.

U.S. Negotiating Position on Investment Protections

The United States has led the world in promoting strong investment protections in more than 38 bilateral investment treaties (BITs). These protections are largely based on the rights enshrined in the Takings, Equal Protection and Due Process clauses of the U.S. Constitution and over 200 years of U.S. jurisprudence. In particular, U.S. BITs include the following core commitments:

NO DISCRIMINATION in favor of domestic investors or other foreign investors (the better of national treatment or most-favored-nation treatment).

TREATMENT IN ACCORDANCE WITH INTERNATIONAL LAW, including fair and equitable treatment and full protection and security.

PROMPT COMPENSATION FOR DIRECT AND INDIRECT EXPROPRIATIONS.

PROTECTION FOR THE MOVEMENT OF CAPITAL, including the repatriation of profits.

NO PERFORMANCE REQUIREMENTS, such as requirements that investors source inputs locally or export finished products.

RESOLUTION OF DISPUTES between investors and governments before objective, impartial arbitral tribunals with respect to treaty claims and existing and future investment agreements.

Replicating these basic protections in future trade and investment agreements is essential to protect critical U.S. investments abroad.

Investment protections were a core issue in the Congressional debate on Trade Promotion Authority (TPA) that was ultimately enacted as part of the Trade Act of 2002 in August 2002. Following passage of TPA, the Administration continued its interagency review of the U.S. negotiating position on investment and made a number of significant changes in the U.S. position, which are now reflected in several recently concluded Free Trade Agreements (FTAs), the revised Model Bilateral Investment Treaty (BIT) and the Uruguay BIT. Discussed below are the importance of investment protections, the Congressional debate and framework on investment, the investment provisions in recently concluded FTAs and the Model BIT, and a brief review of the operation of U.S. BITs and NAFTA Chapter 11, including a summary of noteworthy investment cases.

Importance of Strong Investment Protections

The investment protections contained in BITs and FTA investment chapters are critical for U.S. businesses that invest around the world, where legal systems are less developed and investments are oftentimes at a very high risk. U.S. BITs have traditionally provided core protections that help ensure the security and long-term viability of investments that are critical not only for U.S. companies, but for broader national U.S. interests, such as developing stable sources of energy supplies, continuing the United States’ leadership in creating new and advanced technologies and promoting stability, economic development and the rule of law.

While many U.S. companies have not needed to employ the formal investor-state dispute settlement procedures in BITs and FTAs, these protections are critical to resolving disputes. When faced with foreign government actions that violate these protections, investors are able to point to the government’s obligations under such agreements, which oftentimes spurs a resolution – in large part because of the comprehensive nature of such protections and their clarity. Furthermore, U.S. companies account for approximately one-third of the BIT claims filed before the World Bank’s International Centre for Settlement of Investment Disputes (ICSID). Weakening these provisions will undermine U.S. interests and is likely to create an even greater need for resort to the formal dispute settlement procedures.

Trade Promotion Authority Provisions on Investment

Investment has been a principal negotiating objective in trade negotiating authority legislation since 1984. Congress included strong negotiating objectives on investment in the Bipartisan Trade Promotion Authority Act, including the core protections, while making several improvements, including with respect to transparency.

In 2002, Congress debated an amendment that would have revised the negotiating objective in a manner that would weaken protections for expropriation and fair and equitable treatment, create a safe harbor for all but intentionally discriminatory public welfare regulations, and mandate particular negotiating outcomes. ECAT led a business community effort to educate the Senate on the technical details of these investment issues and to explain business community concerns about how this amendment would weaken important investment protections. The Senate rejected this amendment by a vote of 55-to-41. Instead, Congress approved an investment negotiating objective in TPA that sought to ensure high protections for U.S. investors abroad consistent with U.S. legal principles and practice in several important respects. It included the following:

NO DISCRIMINATION in favor of domestic investors or other foreign investors (the better of national treatment or most favored nation treatment).
TREATMENT IN ACCORDANCE WITH INTERNATIONAL LAW, including fair and equitable treatment, consistent with U.S. legal principles and practice, and full protection and security.
PROMPT COMPENSATION FOR DIRECT AND INDIRECT EXPROPRIATIONS, consistent with U.S. legal principles and practice.
PROTECTION FOR THE MOVEMENT OF CAPITAL, including the repatriation of profits.
NO PERFORMANCE REQUIREMENTS, such as requirements that investors source inputs locally or export finished products.
RESOLUTION OF DISPUTES between investors and governments before objective, impartial arbitral tribunals, with improvements to weed out frivolous claims, to improve the selection of arbitrators, and establish an appellate or review mechanism.
THE FULLEST MEASURE OF TRANSPARENCY in disputes between investors and governments.
NO GREATER SUBSTANTIVE RIGHTS with respect to investment protections should be provided to foreign investors in the United States compared to U.S. investors in the United States.

Investment Protections in Recent Free Trade Agreements, the Model Bilateral Investment Treaty and the Uruguay BIT

Following enactment of the Trade Act of 2002, the Administration continued its inter-agency review of the U.S. negotiating position on investment. The Administration put forward several important changes to the U.S. negotiating position that are now reflected in the Singapore, Chile and Morocco FTAs implemented in 2003 and 2004, and the Central America-Dominican Republic FTA (CAFTA-DR). In November 2004, the Administration also concluded its internal deliberations on the revised Model BIT and in December 2004, signed the first U.S. BIT negotiated since the early 1990s with Uruguay.

The Administration has taken major steps to address Congress’ objectives on investment, including the following provisions found in the CAFTA-DR (and very similar provisions in the Chile, Singapore and Morocco FTAs, as well as the revised Model BIT and the Uruguay BIT), including:

Incorporating the test from landmark Supreme Court case Penn Central Transp. v. New York City on what constitutes an indirect expropriation.
Defining expropriation in terms of “property rights or property interests” based on the U.S. Constitution’s Takings Clause.
Defining “fair and equitable treatment” in terms of due process rights.
Clarifying that non-discriminatory, regulatory government actions designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, only rarely result in indirect expropriations.
Defining expropriation and fair and equitable protections as reflecting customary international law, defined as the “general and consistent practice of States,” which includes the United States.
Creating a motion to dismiss process based on Federal Rules of Civil Procedure 12(b)(6).
Including provisions to ensure the fullest possible transparency and the ability of panels to accept amicus briefs.
Including the most concrete language in any FTA on a timeframe for negotiating an investor-state appellate or other review procedure.

While ECAT is very supportive of the increased transparency, procedural and many other innovations, ECAT remains very concerned, however, that some provisions included in recent FTAs have lowered the standard of protection for U.S. investors abroad below that enjoyed by foreign investors in the United States. Since foreign investors in the United States already enjoy access to U.S. laws and the U.S. court system, which provide for a wider range of challenges, these changes will not affect foreign investors in the United States or U.S. liability, but will only have a significant adverse impact on U.S. investors abroad. As a result of these concerns, many of the country’s chief executives have expressed their concern to the Administration:

On March 17, 2004, the President’s Export Council sent a letter stating that “We are deeply concerned that investor protections in these agreements may be weakened in order to satisfy defensive and regulatory concerns on the part of a few USG agencies -- concerns that we believe can be addressed without denying U.S. investors adequate protections and effective remedies under these agreements.” The President’s Export Council urged that “traditional protections for investors including international arbitration must be preserved and expanded in future U.S. FTAs and BITs.”
On March 19, 2004, 23 Chief Executives of U.S. companies representing most major sectors of the U.S. economy sent a strong letter to the President expressing their concerns about an apparent policy shift. They wrote that “U.S. negotiators no longer appear to be seeking to ensure protection and dispute resolution for a wide range of sectors such as natural resources and financial services.” The chief executives urged the President to continue to “maintain high standards of protection for U.S. investment.”

ECAT formally presented its views to the Administration on the proposed Model BIT in a letter dated December 18, 2003 and worked with the Administration and others in the private sector on these issues until the revision of the Model BIT was completed in November 2004.

In particular, ECAT provides the following recommendations on a number of key issues:

Carve-Out for Financial Institutions: The Model BIT and the FTAs provide no access to investor-state mechanisms for discrimination (i.e., national treatment and most-favored-nation) claims by a U.S. financial institution. If national treatment/MFN commitments are made in a BIT or future FTA with regard to financial institutions, such commitments could be enforced only through state-to-state arbitration and subject to carve-out mechanisms described below. Excluding national treatment and MFN obligations from arbitration represents a major setback from prior practice and will leave U.S. investors in financial institutions abroad without effective protection. Several prior BITs, including most notably the U.S-Argentine BIT, provided relatively fulsome protections for U.S. investors in Argentina (although the United States took full reservations). The potential state-to-state mechanism that is available when commitments are made is a politicized process and likely one that the U.S. government would not seek to undertake against a foreign government’s financial measures, even if discriminatory.
Carve-Out for Certain Financial Services: Unlike any of the prior BITs, each of the FTAs, the Model BIT and most recently the U.S.-Uruguay BIT provide that a foreign government may seek to exclude from investor-state arbitration a claim against its financial services measures if such measures were taken for “prudential reasons, including the protection of investors, depositors, policy holders, or persons to whom a fiduciary duty is owed by financial institutions, or to ensure the integrity and stability of the financial system.” Each of these agreements also includes a lengthy and cumbersome process to determine whether a measure falls within the carve-out. The carve-out language is based on language in the General Agreement on Trade in Services (GATS). If the carve-out is found to be applicable, access to investor-state arbitration, as well as redress in local courts, is denied. There is significant concern that such a provision would block or unnecessarily delay many valid claims by U.S. investors.
The Uruguay BIT included some important innovations with respect to the financial services exception, including language that clarifies that the financial services exception is not applicable to “measures that expressly nullify or amend contractual provisions that specify the currency of denomination or the rate of the exchange of currencies.” This language should be included in all future FTAs and BITs where the financial services exception is maintained.
Expropriation: Several very significant changes were made to the expropriation standard in the FTAs and the Model BIT. Most significantly, each of these agreements now defines expropriation in terms of “a tangible or intangible property right or property interest in an investment” rather than in terms of investment (as did former U.S. BITs and the investment chapter of the NAFTA). This modification could result in an inappropriate narrowing of the expropriation protections contrary to TPA. In TPA, Congress directed the Administration to define expropriation “consistent with U.S. legal principles and practice,” which includes, but is not limited to, the Fifth Amendment takings clause of the U.S. Constitution (which discusses takings in terms of “property”). Using the same term (“property”) in an international agreement, however, does not make protections consistent, since U.S. definitions of property are generally broader than those in other countries. This is particularly true in the case of civil law countries, which typically do not recognize contract rights as property, which the United States does. This change could potentially represent a very significant change from existing international protections on expropriation, as well, which generally do protect contract rights from expropriation.
There also remains concern that the language that seeks to define when certain public welfare regulations are not an expropriation is far too broad and more expansive than U.S. takings precedent.
Minimum Standard of Treatment: Each of the FTAs requires treatment in accordance with the customary international law minimum standard of treatment of aliens, including fair and equitable treatment and full protection and security. The FTAs define fair and equitable to include (but not be limited to) procedural due process standards. A side letter appropriately clarifies that the minimum standard of treatment of aliens refers to “all customary international law principles that protect the economic rights and interests of aliens.”
Capital Controls: Each of the FTAs include a commitment to the free flow of capital, which is critical to attract investment.
In the Chile and Singapore FTAs, annexes to the investment chapters include some limitations on an investor’s access to dispute settlement with respect to certain claims involving restrictions on the flow of certain types of capital. In particular, the annexes provide that with respect to short-term capital other than foreign direct investment, investors must wait one year (rather than six months) to seek arbitration in the event of a capital control. Further, they provide that a government is not liable if a capital control involving short-term flows is in place for less than one year and the capital control does not “substantially impede” a transfer. This model should not be replicated in future FTAs or BITs.
Binding Interpretations: The FTAs provide that interpretations of the investment chapter by the Joint Committee (made up of the governmental parties) shall be binding on an investor-to-state tribunal. Given the July 2001 interpretation of the NAFTA Joint Commission that defined the international law standard as the “minimum standard of treatment of aliens,” without public consultation, ECAT is concerned that this type of a provision could be overused. In any event, such interpretations cannot represent an amendment to the underlying agreement, which should properly be an issue for the investor-to-state tribunal to consider.
Investment Agreements: In a significant deviation from U.S. BITs, the Singapore, Chile, Morocco and CAFTA-DR FTAs provide protection for the breach of investment agreements (an agreement between an investor and a foreign government) only if the investment agreement was entered into after the FTA comes into force (two years after in the case of the Chile FTA). This represents a significant weakening of U.S. protections, since U.S. BITs from the 1980s onward have included full access to arbitration for both existing and future investment agreements. Given the long-term nature of many U.S. investments abroad, the prospective only availability of neutral dispute settlement fora exempts major pieces of U.S. investment. Failure to provide coverage for investment agreements not only harms U.S. commercial interests, it undermines broader U.S. interests in energy security, stability and the rule of law.
In the November 2004 revised Model BIT, the Administration abandoned its prospective-only protection for investment agreements. Rather, the 2004 Model BIT more appropriately includes a more detailed definition of investment agreements, while also providing access to investor-state dispute settlement for breaches of existing as well as future investment agreements. This language was included in the Uruguay BIT signed in December 2004. ECAT urges similar language to be included in all future FTAs and BITs.

As described in section 5, the United States also deviated from its high standard investment model in the recently concluded U.S.-Australia FTA, which failed to include any protections (not even prospective) for investment agreements and no investor-state mechanism at all, although the parties committed to reviewing the latter issue if circumstances warranted.

The impetus for the changes in investment protections appears largely to result from a generalized, but theoretical, concern that the United States could itself face liability under the rules it has traditionally supported. Thus, there has been a push by some to lower protections for U.S. investors abroad in the belief that the United States, as a potential defendant, will have less legal exposure. In fact, while lessening protections does indeed expose U.S. investors to greater risk abroad, it does not appreciably lessen the potential liability of the United States because these treaty rules are for the most part already reflected in U.S. law. In the wake of weakened treaty protections, foreign investors in the United States will still enjoy access to an independent judiciary applying similar level protections as afforded by the traditional investor-state mechanism – this time under U.S. law. By contrast, U.S. investors abroad will be left to the vagaries of local law and local courts.

Operation of Bilateral Investment Treaties and NAFTA Chapter 11

U.S. BITs and FTAs, in most respects, set forth strong investment protections and provide investors with the opportunity to seek review of governmental action before international arbitration panels, such ICSID. As explained above, these rules are very important for U.S. commercial, as well as our broader economic, energy and security interests.

In recent years, some have raised concern about a number of cases filed pursuant to the provisions of NAFTA Chapter 11. (Notably, the United States has never been subject to an investor-state claim under any of the 38 BITs in force.). In fact, there have only been 42 cases filed against all three NAFTA countries (Canada, Mexico and the United States) in ten years – far fewer than the 195 expropriation-only cases filed against the U.S. federal government in 2004 alone.

Even more importantly, none of the cases has reached the type of conclusion that NAFTA’s critics have feared. In fact, much of the criticism has focused on cases that have been filed and not even decided. Indeed, in the three decisions that have been reached in Chapter 11 cases against the United States (of the eleven sets of cases filed), the investors’ claims have been rejected:

ADF Group Inc. v. United States. A Canadian corporation challenged U.S. law that requires the purchase of domestically produced steel for certain highway projects. In January 2003, the arbitration panel rejected ADF’s claim in its entirety.
Mondev International v. United States. A Canadian corporation challenged the judgments by a court that provided immunity to a U.S. regulatory entity. In October 2002, the arbitration panel rejected Mondev’s claim in its entirety.
Loewen v. United States. The formerly Canadian-based funeral home company Loewen was challenged in Mississippi court by a U.S. funeral home over transactions involving less than $5 million. A jury awarded the U.S. funeral home $500 million in punitive damages. This award was the largest in Mississippi’s history and equaled 78 percent of Loewen’s net worth. (According to Loewen’s pleadings, the $400 million punitive award was 50 times greater than the largest punitive award ever considered by the Mississippi Supreme Court and 200 times greater than the largest award ever upheld by that Court.) Under Mississippi law, Loewen could only appeal this decision if it posted bond equal to 125% of the verdict. While Mississippi law permits a court to reduce or eliminate the bond requirement for “good cause,” Loewen’s petition for reduction/elimination was rejected. As a result of the onerous and bankrupting bond requirements, which the Mississippi courts failed to reduce, Loewen was effectively prevented from appealing its case in the Mississippi court system. Without an effective ability to appeal, Loewen settled the case for $175 million and brought a claim under NAFTA Chapter 11. In 2003, this claim was rejected by the investor-state panel reviewing it.

Another case has oftentimes come under attack as evidence that Chapter 11 provides foreign investors with greater rights than U.S. investors; in fact, it has yet to be decided:

Methanex v. United States. Canadian-based Methanex challenged California’s ban of the gasoline additive methyhl-butyl ether (MTBE) as expropriatory, discriminatory and violating the minimum standard of treatment under Chapter 11. Contrary to claims that this case represents how the NAFTA rules provide foreign investors with greater rights than U.S. investors, these claims could largely have been brought in U.S. court. Furthermore, in a decision in August 2002, the arbitration panel found preliminarily that Methanex had failed to meet its legal threshold for challenging the U.S. action and provided Methanex an additional period to amend its claim. Methanex subsequently refiled its claim. The bottom line is that there is no decision in this case.

Other cases have been wrongly criticized as overturning environmental and other safety laws. In fact, arbitration panels can only award damages and cannot change law. Furthermore, the cases that have been most heavily criticized are ones where the foreign courts found that the foreign governments had acted wrongly:

Ethyl v. Canada. The U.S.-based Ethyl Corporation challenged Canada’s legislation banning the importation of a fuel additive, MMT (methylcyclopentadienyl manganese tricarbonyl). The NAFTA panel never issued a decision in this case. Rather, the Government of Canada settled it after it lost a similar case in its own court system brought by Canadian provinces. The court found that Canada’s importation ban (while still allowing domestic production) was not justified as an environmental provision, but was discriminatory and unjustified.
Metalclad v. Mexico. After U.S.-based Metalclad had obtained all necessary federal permits for the construction of a waste disposal facility and several environmental studies demonstrated that the facility would reduce waste in the region and not harm the environment, the local jurisdiction denied Metalclad a municipal construction permit. The governor then issued an Ecological Decree for the protection of cactus in the region. A NAFTA panel and then a Mexican court held that the local government action was not justified for environmental reasons but was politically motivated. Both found that the local government had essentially expropriated Metalclad’s investment and ordered the payment of compensation.

ECAT will continue to monitor these cases and others that arise, as well as the full operation of U.S. BITs, NAFTA Chapter 11 and new FTAs containing investment chapters.

ECAT POSITION: ECAT believes that U.S. trade and international tax policies should recognize the vital importance of U.S. foreign direct investment to U.S. economic growth and should promote the expansion of U.S. trade and investment. ECAT supports, therefore, a strong U.S. negotiating position on investment that promotes market access and investment protections for the benefit of U.S. companies, workers and their families and the U.S. economy. ECAT recognizes that Congress’ objectives on investment negotiations in the Trade Act of 2002 have been substantially incorporated into new agreements, although ECAT strongly believes that these objectives could more effectively be implemented through provisions providing stronger protections for U.S. investment abroad, particularly with respect to fair and equitable treatment, full protection and security, compensation for expropriation (including with respect to all forms of property recognized in the United States, including contract rights) and full access to arbitration for U.S. financial services institutions, for breaches of existing and future investment agreements and for all U.S. investors with respect to financial services measures. The United States should also refrain from weakening existing agreements or undermining protections already provided in existing BITs through the negotiation of new free trade agreement and instead ensure that the FTAs reflect the high standard commitments discussed above.

OECD Guidelines for Multinational Enterprises

At the June 2000 OECD Council meeting, the 29 OECD member countries and the governments of Argentina, Brazil, Chile and Slovakia adopted a revised set of Guidelines for Multinational Enterprises. These Guidelines, which have been revised periodically since their creation in 1976 as part of the OECD Declaration on International Investment and Multinational Enterprises, represent legally non-binding recommendations from the OECD governments to businesses with the aim of preventing conflict and promoting greater confidence and predictability between businesses and the countries in which they operate.

The revised Guidelines attempt to address many of the concerns raised about the increasing globalization of the world economy. In particular, the Guidelines were revised to include recommendations that companies contribute to the abolition of child labor and all forms of forced or compulsory labor. The recommendations on the environment encourage companies to improve their own environmental performance through a variety of means, including the creation of a system of environmental management and stronger contingency planning. The Guidelines updated the chapter on disclosure to reflect the OECD Principles on Corporate Governance. The Guidelines also incorporated a general policy provision on respecting human rights, as well as new chapters on combating bribery and on consumer protection. The revised recommendations also focused on the need to enhance efforts to implement the Guidelines through the National Contact Points, which have been established in member countries to promote adherence to the guidelines. The Guidelines clarified as well the role of the OECD’s Committee on International Investment and Multinational Enterprises, which should continue to provide clarifications of the Guidelines and a forum for their review and implementation.

Antibribery Initiatives

The OECD Convention on Combating Bribery of Foreign Public Officials went into effect in February 1999 and has now been ratified by all 35 countries (including the United States, which ratified the Convention in December 1998). The Convention was adopted to require OECD member countries to criminalize bribery of public officials during business transactions. It is based on the U.S. Foreign Corrupt Practices Act that prohibits bribery of foreign public officials and political candidates. The United States would like to expand the coverage of the OECD Convention to include bribery of foreign political parties, party officials, and candidates for political office. It is also important that the United States continue to monitor OECD country implementation of the Convention to ensure that it is effectively enforced.

In September 2000, the United States ratified the Inter-American Convention on Corruption and continues to encourage greater regional anti-corruption efforts. In 2000, the United States also linked benefits under the African Growth and Opportunity Act and the Caribbean Basin Trade Partnership Act (described in section 10) to these countries’ efforts to combat bribery.

The United States is also continuing its anti-corruption efforts by working with the World Bank to improve anti-fraud and anti-corruption efforts in the administration of World Bank contracts. Anti-corruption provisions were added as a negotiating objective to TPA for the first time ever, as enacted in the Trade Act of 2002.

ECAT POSITION: ECAT supports U.S. efforts to ensure that the OECD Convention on Combating Bribery of Foreign Public Officials and the Inter-American Convention on Corruption are effectively implemented and to combat the problem of foreign corruption through other international efforts.

¹ICT-producing industries produce the hardware, software and services – computers, semiconductors, electronics, and information services to name just a few – involved in collecting, processing and sharing information.
²These industries, such as telecommunications and financial services, invest heavily in ICT products and services.