Emergency Committee For American Trade - Publications

ECAT 2008 AGENDA

SECTION III.1: 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. Several aspects of investment are reviewed in this section, including the role of investment in promoting economic growth and poverty reduction, suggested modifications of the national security review of foreign investment in the United States, investment protections negotiated in bilateral investment treaties and free trade agreements, and multilateral frameworks to promote strong investment policies.

Importance of Investment to Economic Growth and Poverty Reduction

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 inflows rose phenomenally in the last three decades, from $14 billion to an estimated $1.2 trillion between 1970 and 2006. While there were a few years of declines in foreign investment, global foreign-investment inflows rebounded again starting in 2004 through 2006, while still below their peak of $1.5 trillion in 2000. The declines in investment flows between 2000 and 2003 appear largely due to a slowing down of the global economy, a decline in cross-border mergers and acquisitions and other factors. The increase in investment inflows between 2003 and 2006 was largely directed to developed countries.

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 inflows into the United States are a major source of U.S. economic growth. In 2006, the United States was the largest country recipient of foreign investment, totaling $177 billion in inflows. Foreign investment stocks in the United States equaled $1.8 trillion in 2006. Foreign investment in the United States promotes U.S. exports, economic and employment opportunities 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, accounting for nearly five percent of total U.S. employment in private industries.
U.S. foreign-investment outflows are also critically important to supporting growth in the U.S. and global economies. The U.S. foreign-investment position overseas equaled $2.5 trillion in 2006. U.S. investment overseas, which depends on strong investment protections, is critical for supporting U.S. economic growth. The return on U.S. investment abroad is huge and very beneficial to the U.S. economy. Over the past 20 years, U.S. companies that invest abroad have:
exported more (accounting for one-half to three-quarters 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. As well, 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. U.S. companies’ receipts from overseas operations now account for approximately a quarter of all profits. U.S. industries that benefit from investment are found in every major sector of the U.S. economy, from agricultural producers and manufacturers, which oftentimes use investments in distribution networks to deliver their U.S. exports to foreign markets, to the full range of service producers, from energy, entertainment and financial services to information technology, retail, transportation and other services, who require such investments to participate in foreign services markets.

U.S. investment abroad and the investment-access provisions and protections contained in trade agreements and bilateral investment treaties (BITs) also serve other important U.S. national objectives, including promoting improved economic development and stability, protection of intellectual property, transparency and the rule of law. Strong investment protections and other policies help support U.S. foreign investment, which, 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.

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 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 promote transparency and a market-based free enterprise system. Foreign investment also serves as a model in many countries for improved worker conditions and environmental practices, as well as respect for labor rights.

Investment overseas by U.S. companies is critical for supporting global economic growth and the reduction of poverty. Already global foreign direct investment flows are the largest external source of financing for developing countries, equal to about one-third of developing countries’ GDP and generating some 53 million jobs in developing countries, according to UNCTAD. UNCTAD further explains:

“Foreign direct investment (FDI) has the potential to generate employment, raise productivity, transfer skills and technology, enhance exports and contribute to the long-term economic development of the world’s developing countries. More than ever, countries at all levels of development seek to leverage FDI for development.”

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 two bilateral investment treaties (with Uruguay and Rwanda) and has included very similar provisions in investment chapters in free trade agreements with Chile, Singapore, Morocco, Central America and the Dominican Republic, Oman, Peru, Colombia, Panama and Korea. Negotiations are ongoing with several other countries.

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.
Outbound 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 is strengthened by 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 the 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 I.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 industries – those industries that use ICT heavily – are also industries whose exports represent a high share of total output and, for decades, have had higher levels of exports, imports and total trade as a share of total sales than non-ICT-consuming industries. 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.

National Security Reviews of Foreign Investments

Following several years of Congressional scrutiny, the longstanding Committee on Foreign Investment in the United States (CFIUS) framework to provide objective and intensive national security reviews of potential acquisitions in the United States was updated and modified in 2007 with Congressional passage and enactment of H.R. 556, the Foreign Investment and National Security Act of 2007. Work will continue in 2008 to update the regulations governing the review process.

The Original CFIUS Framework

The 1988 Exon-Florio amendment to Section 721 of the Defense Production Act of 1950 provided authority to the President to suspend or prohibit any foreign acquisition, merger or takeover of a U.S. corporation that is determined to threaten the national security of the United States. The President can exercise this authority only if he finds:

there is credible evidence that the foreign entity exercising control might take action that threatens national security, and
the provisions of law, other than the International Emergency Economic Powers Act, do not provide adequate and appropriate authority to protect the national security.

The President’s investigative authority was delegated to the Committee on Foreign Investment in the United States (CFIUS) — an interagency committee, including 12 agencies, that was first established in 1975. CFIUS was chaired by the Secretary of the Treasury and included government representatives from the Departments of Commerce, Defense, Justice, State, and Homeland Security, as well as representatives from the Office of the President.

Once CFIUS received notification of an acquisition, merger or takeover, it began a 30-day review process to evaluate the potential national-security implications of the transaction. If CFIUS determined there was no potential threat, the transaction was allowed to proceed. If CFIUS determined that there were potential national-security threats by a proposed transaction, it then proceeded with a full 45-day investigation. CFIUS also used its authority in several instances to seek assurances and modifications in the investment structure or other aspects of the investor’s operation in the United States or abroad to ensure that U.S. national security is protected as a condition for allowing a transaction to proceed. Section 837(a) of the National Defense Authorization Act for Fiscal Year 1993 (the so-called "Byrd Amendment") amended Section 721 of the Defense Production Act by requiring a 45-day investigation if the party acquiring a U.S. company is controlled by or acting on behalf of a foreign government and the acquisition “could result in control of a person engaged in interstate commerce in the U.S. that could affect the national security of the U.S." If CFIUS concluded after the 45-day investigation that there was a potential national-security threat, the President then had the authority to block or suspend the transaction at issue, with a decision due in 15 days.

Foreign Investment and National Security Act of 2007

As a result of concerns over a few proposed foreign transactions, both the House and Senate developed competing legislative approaches to address perceived deficiencies in the CFIUS process and Congress’ role in oversight of that process in 2006 and 2007. In 2007, the final version of the Foreign Investment and National Security Act of 2007 (FINSA), H.R. 556, was approved in the Senate by unanimous consent on June 29, 2007, and by a vote of 370-to-45 in the House on July 11, 2007. The President signed the legislation into law on July 26, 2007.

In general, the changes made by FINSA will maintain a strong framework for CFIUS to review, make decisions and notify Congress on the national security implications of foreign investments. By preserving an objective, fact-based and time-limited process, this legislation will continue to support the open investment climate that the United States has long fostered and sets a positive example for foreign governments that have or may institute their own investment reviews. Key changes include:

Statutory establishment of CFIUS, with the Secretary of the Treasury as the Chairperson. Other members shall include Secretaries of Commerce, Defense, Energy, Homeland Security, and State; the Attorney General; and other heads of Executive Branch departments or agencies as designated by the President. Non-voting CFIUS members also include the Secretary of Labor and the Director of National Intelligence. Addition of new assistant secretary to the Department of the Treasury, to work on CFIUS matters.
Designation by the Secretary of the Treasury of a lead agency for each transaction, including to negotiate and ensure compliance with mitigation agreements or other conditions.
Authorization of CFIUS to self-initiate reviews of transactions, including previously reviewed transactions in certain circumstances.
Requirement for CFIUS approval for requests to withdraw notices that initiate CFIUS reviews.
Expansion of the threshold for moving into the investigation phase to include either a finding that:
- the transaction: (1) threatens to impair national security and the threat has not been mitigated; (2) is a foreign-government controlled transaction; or (3) would result in control of any critical infrastructure within the United States if that could impair national security and that impairment to national security has not been mitigated (except that no investigation is required where the lead agency and the Secretary of the Treasury find that transactions involving foreign-government control or critical infrastructure will not impair U.S. national security); or
- the lead agency recommends an investigation and the Committee concurs. 94
- Requirement that reviews and investigations be certified and signed by Chairperson and head of the lead agency and sent to key House and Senate leadership. In cases involving critical infrastructure, certifications and reports must be presented to Senators or House Members from the State or district, respectively, where the principal place of business of the acquired U.S. entity is located.
- Requirement that Director of National Intelligence carry out a thorough analysis of any threat to U.S. national security of any covered transaction and provide that analysis to CFIUS.
- Requirement for reviews and monitoring of mitigation and assurance agreements, as well as of transactions for which notice has been withdrawn, and reconsideration of transactions where there has been a breach of the mitigation agreement. Penalties are to be applied for violations of mitigation agreements, which potentially could include a reopening of a completed transaction.
- Incorporation of strong protections for confidential and proprietary information.
- Requirement that CFIUS consider identified factors as mandatory and expansion of the factors to include whether the covered transaction has a security-related impact on critical infrastructure, including major energy assets, or on critical technologies; and is a foreign government-controlled transaction.
- Provision of increased information to Congress on foreign-investment reviews and the operation of CFIUS.

On January 23, 2008, the President issued an Executive Order modifying Executive Order 11858 to implement FINSA. The Executive Order designated the United States Trade Representative and the Director of the Office of Science and Technology Policy as members of CFIUS and designated others members of the Office of the President as observers.

Next Steps

The Treasury Department and CFIUS are in the midst of preparing regulations to implement H.R. 556. As this process continues, ECAT strongly urges the implementation of FINSA to ensure that it represents a credible, objective and strong process focused on national security. There are a number of key principles to maintain in reforming and improving the CFIUS process, including ensuring that the national-security review process is:

Objective, fact-based and analytically rigorous.
Focused on national-security issues.
Taking into full account existing legislation and regulations that mitigate potential national security issues.
Taking full account of information provided by the parties and safeguards built into the transaction, while respecting and ensuring confidentiality.
Operating on a case-by-case basis and remaining sufficiently flexible to cover new national-security issues as they arise.
Operating in a predictable and timely manner.
Not a substitute for other more targeted and effective tools to protect U.S. national security.

These principles should also guide the implementation of FINSA and the resulting outcome should explicitly emphasize that the U.S. system remains objective, fact-based and national-security-focused.

In addition, ECAT urges that FINSA be implemented to:

Focus on national-security implications. By clarifying “national security” to include “critical infrastructure” in FINSA, Congress made clear that critical infrastructure, while important to highlight, fundamentally is defined as a subset of national security, not a separate category in and of itself. Overly broad definitions of “critical infrastructure” would ignore this construct, and potentially result in very severe mirror-image language by foreign countries, many of which are interested in limiting investments in important areas, whether or not related to national security.
Clarify that, while “major energy assets” are included as part of the definition of “critical infrastructure,” FINSA does not intend, nor require, every energy transaction to undergo CFIUS review. Rather, it is only transactions involving those major energy assets that implicate national security that are the focus of CFIUS. Such a clarification is vitally important to ensure that foreign governments do not adopt overly expansive definitions themselves, which could undermine existing and future U.S. energy investments overseas vital to the U.S. economy and security.
Avoid adopting definitions of critical infrastructure from other areas with very different objectives, such as the Department of Homeland Security’s Chemical Facility Anti-Terrorism Standard, which has a different purpose and is likely to be far more expansive than would be appropriate for the CFIUS process.
Clarify that CFIUS should take into account the extent to which existing laws, regulations and related measures already effectively mitigate or permit the government to mitigate the identified risk that the transaction creates, such that further mitigation measures need not and should not be imposed by CFIUS on an individual transaction.
Recognize that the mere participation of a foreign government in a transaction does not imply control. Rather, an evaluation must be made of the foreign government’s role in the transaction, its share of ownership and its actual level of control.
Clarify and implement fully the strong confidentiality requirements set forth in FINSA.

ECAT Position: ECAT supports the full implementation of the Foreign Investment and National Security Act of 2007 to provide for a fact-based and objective national-security investment-review process that focuses on potential national-security threats of proposed transactions.

Promoting and Protecting U.S. Investment Abroad

Fundamental to the U.S. legal system is the right of individuals to protect themselves against arbitrary, discriminatory and expropriatory government actions. From the Due Process, Equal Protection and Takings Clauses of the U.S. Constitution to the Administrative Procedure Act to a host of other federal and state laws, the U.S. legal system guarantees Americans and foreigners the right to protect themselves against fundamentally unfair government action. Indeed, hundreds of cases are filed against alleged U.S. government expropriations under the Takings Clause alone every year in U.S. federal court. Many do not go far, but they do serve the vital purpose of ensuring that government action does not unfairly or improperly harm the United States.

The investment chapter of U.S. bilateral investment treaties (BITs) and free trade agreements fully embodies those fundamental American principles and, thereby, promotes broader U.S. national interests in the rule of law and the protection of individuals – without giving foreign investors special rights that ordinary U.S. citizens do not enjoy, as several recent FTAs have made very explicit. In addition, these agreements also improve the access of U.S. investment abroad, by eliminating discriminatory and other barriers to U.S. participation in overseas markets.

The United States has led the world in promoting strong investment protections in more than 38 bilateral investment treaties (BITs) and as a member of trade agreements, including the North America Free Trade Agreement (NAFTA), and the Chile, Singapore, Morocco, Central American and Dominican Republic, Oman, Peru, Colombia, Panama and Korea agreements.

In particular, U.S. BITs and recent FTA investment chapters 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.

The remainder of this section discusses the importance of strong investment protections, the potential expansion of the BIT program, the Congressional framework, 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 investor-state cases.

Importance of Strong Investment Provisions

The investment protections and access 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. These provisions are oftentimes essential for U.S. farmers, manufacturers, service providers and their workers to access foreign markets, by ensuring U.S. enterprises:

Can set up distribution networks to export successfully into foreign markets. Notably, nearly half of all U.S. exports go to U.S. foreign subsidiaries worldwide.
Can fully benefit from the elimination of services barriers, by providing important financial and other services directly to foreign consumers through branch and affiliate offices.
Can set up networks to research and develop products that meet local tastes and increase sales.
Are protected against discrimination, and arbitrary and capricious government actions.
Are provided with an objective and fair forum to address unfair government actions. It is important to note that arbitrators in investor-state panels are highly experienced individuals from academia, the judiciary and other parts of government and the legal community. Arbitrators have included former Congressman and Federal Circuit Judge Abner Mikva, former Secretary of State Warren Christopher and former International Court Chief Justice Stephen Schwebel.

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. For example, BITs are a vital tool in ensuring America's energy security by providing that America's multi-billion dollar long-term investments in exploration, production, and related infrastructure projects are protected by a strong rules-based system.

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 spur 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.

Expansion of Bilateral Investment Treaty Program to Major Economies

Given the important benefits of BITs for the United States, its industries and workers, ECAT strongly supports efforts to expand the BIT program to seek BITs with major economies. At present, the United States has BITs with 38 countries, and another BIT with Rwanda that needs Senate ratification before entering into force. The United States began BIT negotiations with Pakistan, which are currently on hold given major differences in objectives.

While there are no active BIT negotiations at present, the Administration is in preliminary discussions internally and with some countries about the possibility of negotiating a BIT.

ECAT is particularly interested in potential BIT negotiations with major countries, such as China, India, Russia, Brazil and Saudi Arabia. With major and growing economies, these countries represent extremely important markets now and for decades to come. While many of our companies are already invested in these countries, investments are limited by inadequate market openness and transparency. BITs with these countries can also improve U.S. competitiveness. Many of these countries already have BITs in force with countries whose companies compete with the United States, putting U.S. companies at a disadvantage.

Given the increasing investment abroad by many of these countries and their own recognition of the importance of strong investment provisions and protections, ECAT strongly believes that now is an opportune moment to engage in BIT negotiations with these and other major countries around the world.

Trade Promotion Authority Objectives on Investment and 2007 Congressional-Administration Trade Deal

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 (TPA), 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 against expropriation and for 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.

In the Congressional-Administration trade deal of May 10, 2007, it was agreed that trade agreements would also contain language making more explicit that foreign investors would not be accorded greater substantive rights in the United States than domestic investors.

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

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 largely reflected in the Singapore, Chile, Morocco, Central America-Dominican Republic, Oman, Peru, Colombia and Panama trade agreements. 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, which was ratified on September 12, 2006. More recently, the President signed the U.S.-Rwanda BIT in February 2008.

The Administration has taken major steps to address Congress’ objectives on investment, including the following provisions found in recent trade agreements with Chile, Singapore, Morocco, Central America-Dominican Republic, Oman, Peru, Colombia, and Panama, as well as the revised Model BIT and the Uruguay and Rwanda BITs, 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.

Additional language was included in the Peru, Colombia, Panama and Korea trade agreements in accordance with the Congressional-Administration trade deal of May 10, 2007.

While ECAT is very supportive of the increased transparency and procedural and many other innovations, ECAT remains very concerned, however, that some provisions included in recent trade agreements 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. Among the key issues are:

Carve-Out for Financial Institutions: The Model BIT and recent 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 investor-state arbitration represents a major setback from prior practice and will leave U.S. investors in financial institutions abroad without effective protection.
ECAT is very pleased to see that the recently signed Rwanda BIT eliminates this disparate treatment and provides investor-state access to U.S. financial institutions. ECAT looks forward to all future agreements following this model.
Carve-Out for Certain Financial Services: Unlike any of the prior BITs, each of the recent 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 recent 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). 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”).
Minimum Standard of Treatment: Each of the recent 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. These 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 recent 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-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-state tribunal to consider.
Investment Agreements: In a significant deviation from U.S. BITs, the Singapore, Chile, Morocco and the Central America-Dominican Republic 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, as well as the Oman, Peru, Colombia, Panama and Korea trade agreements. ECAT urges similar language to be included in all future FTAs and BITs.

As described in section IV.4, 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 provided 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, NAFTA Chapter 11 and Trade Agreements

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 10 years – far fewer than the 195 expropriation-only cases filed against the U.S. federal government in any single year.

Even more importantly, none of the cases has reached the type of conclusion that NAFTA’s critics have feared. Even the frequently complained of Methanex case saw all claims dismissed in 2006. Indeed, in the four decisions that have been reached in Chapter 11 cases against the United States, the investors’ claims have been rejected:

Methanex v. United States. Canadian-based Methanex challenged California’s ban of the gasoline additive methyl-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. On August 9, 2005, a NAFTA panel dismissed all of the claims and awarded the United States legal fees of approximately $4 million.
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 $500 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 percent 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 on both substantive and procedural grounds.

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 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 also strongly seeks the initiation of bilateral investment treaty (BIT) negotiations with major countries, such as China, India, Russia, Brazil and Saudi Arabia.

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; 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.

OECD Policy Framework for Investment

In May 2006, the Organization for Economic Cooperation and Development (OECD) adopted the Policy Framework for Investment as a guidepost for developing countries to spur investment through adopting improved regimes in a number of policy areas, including investment, trade, tax, competition, human resources, governance, infrastructure and financial services.

ECAT welcomes the efforts of the OECD to create a useable, practical blueprint to help developing countries further develop and reform their economies to create a healthy climate for investment. The breadth of issues covered in this blueprint is extremely useful to demonstrate the many facets that affect the growth of international investment flows from reform in specific policy areas to investment protection and transparency. ECAT had urged the OECD to incorporate several modifications to its Policy Framework to reflect the interrelationship of policy reforms, including with respect to transparency and the need to properly reflect the general rules of international law regarding expropriations and other issues, several of which were adopted.

ECAT POSITION: ECAT supports the OECD’s efforts to implement a program to promote the utilization of a strong guidepost for developing countries to spur investment through adopting improved regimes in a number of policy areas, including investment, trade, tax, competition, human resources, governance, infrastructure and financial services.

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 update the chapter on disclosure to reflect the OECD Principles on Corporate Governance. The Guidelines also incorporate a general policy provision on respecting human rights, as well as new chapters on combating bribery and on consumer protection. The revised recommendations also focus 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 clarify 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.

Sovereign Wealth Funds

In the past year, increasing attention has been focused on the growth and investments of so-called sovereign wealth funds (SWFs). SWFs are state-owned entities that manage savings and funds accumulated by national states for the purpose of investment. SWFs have existed for several decades in countries as diverse as Norway, Kuwait and Singapore. Yet, they have grown significantly in number, assets and prominence in recent years. It is currently estimated that there are now about 40 SWFs worldwide that manage approximately $1.9 to $2.9 trillion, according to the International Monetary Fund (IMF).

SWFs have invested in and benefited the United States with investments in productive sectors, promoting employment and economic growth. Indeed, these funds, many which are commodity-based, recycle dollars that the United States uses to purchase oil and other commodities by reinvesting them into the United States, helping to promote greater consumption and investment spending in the United States than otherwise would occur given the low U.S. savings rates. SWFs also provide important benefits to their own economy, promoting revenue stabilization and intergenerational savings.

With the recent growth in SWFs, concerns have arisen, however, over the national security and competitiveness implications of such investments. National security concerns are best addressed through the CFIUS process discussed above, which has increased its focus on foreign-government-controlled transactions that have national security implications.

The Treasury Department has also spurred the initiation of work at both the IMF and the OECD to promote best practices by both SWFs themselves and by recipient governments. The IMF, with the help of the World Bank, is proceeding to develop voluntary best-practice guidelines for SWFs, building on the existing work on foreign-exchange reserve management. Much of this work is focused on the overall objectives and principles of SWFs, their institutional arrangements, their risk-management frameworks, and their transparency and accountability. The OECD is working on best-practice guidelines for recipient countries to ensure open-investment policies.