[CTC] NO TPP with Colombia until the Killing Stops

[Citizens Trade Campaign]

Model Bilateral Investment Treaty (Model BITs)

http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#1 

 

A collective statement outlining the progressive viewpoint below came from: 

 

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

Contents

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

I. Introduction

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

We feel this is a critical moment to take a fresh approach to bilateral
investment treaties and the investment chapters of trade agreements. We are
encouraged by President Obama’s statements indicating a commitment to make
significant changes to the investment rules in U.S. trade agreements, which
are similar to the rules in the U.S. model bilateral investment treaty. For
example, President Obama has stated: “With regards to provisions in several
FTAs that give foreign investors the right to sue governments directly in
foreign tribunals, I will ensure that foreign investor rights are strictly
limited and will fully exempt any law or regulation written to protect
public safety or promote the public interest. And I will never agree to
granting foreign investors any rights in the U.S. greater than those of
Americans.”

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

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

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

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

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

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

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

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

II. Making Dispute Settlement Consistent with the Public Interest

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

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

However, if investors are still allowed to file claims against governments
before international tribunals, they should at least be required to first
exhaust domestic legal remedies. As noted in the Subcommittee report, the
exhaustion requirement is a fundamental principle of international law.
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#i> [i] It is also U.S.
policy with regard to most claims by U.S. citizens against foreign
governments. <http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#ii> [ii]
There is simply no need for foreign investors to pursue claims against the
United States outside of the U.S. judicial system, unless it is in an
attempt to obtain greater rights than those provided under U.S. law. In
developing countries, the exhaustion requirement would promote a key U.S.
foreign policy goal – the strengthening of domestic judicial systems.
Requiring exhaustion would also restore some balance to a system that
currently elevates the interests of foreign investors over other groups –
including labor, environmental and human rights organizations – which do not
enjoy comparable private rights of action to enforce international legal
obligations.

By including a “futility” clause, the administration could avoid placing
unreasonable costs on foreign investors. This would allow investors to
proceed to international tribunals if, for example, domestic remedies caused
undue delay <http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#iii> [iii]
or if domestic courts lacked jurisdiction to provide relief.
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#iv> [iv] Even if the
domestic courts lacked jurisdiction to hear international law claims, the
exhaustion requirement could be satisfied by raising the substance of the
claim under domestic law.
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#v> [v]

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

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

There is broad, bipartisan support for the principle that the investor
protection standards contained in U.S. investment agreements should not
provide foreign investors with greater rights than those enjoyed by U.S.
investors in the United States. Congress first instructed U.S. negotiators
to comply with the “no greater rights” principle in the Trade Act of 2002.
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#vi> [vi] In May 2007,
the Bush Administration and the Democratic leadership in the House of
Representatives agreed that this principle would be explicitly stated in the
preamble of the investment chapters of free trade agreements.
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#vii> [vii] And, as
mentioned earlier, candidate Obama similarly pledged not to grant foreign
investors any rights in the U.S. greater than those of Americans.
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#viii> [viii]

The provisions concerning indirect expropriation and the minimum standard of
treatment in U.S. investment agreements are intended to reflect the relevant
standards under customary international law, which is created through the
“general and consistent practice of states followed by them from a sense of
legal obligation.” <http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#ix>
[ix] Given that the U.S. Constitution provides among the highest levels of
protection for property rights of any country, standards that are based on
the general and consistent practice of nations regarding the protection of
property rights would generally comply with the no greater rights principle.

Unfortunately, arbitral tribunals have not based their interpretations of
the “indirect expropriation” and “minimum standard of treatment” provisions
of investment agreements on the actual practice of nations, but rather have
simply cited the characterization of these standards by other tribunals,
using essentially a common law methodology to create “evolving” standards of
investor protection. <http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#x>
[x] The following recommendations respond to these and other provisions of
the Model BIT that could conflict with the “no greater rights” mandate.

Recommendations:

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

The 2004 Model BIT states that the minimum standard of treatment – including
its “fair and equitable treatment” component – is limited to the customary
international law standard for the treatment of aliens and does not
encompass any additional rights.
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xi> [xi] The Model BIT
similarly states that the prohibition on uncompensated expropriation “is
intended to reflect customary international law concerning the obligation of
States with respect to expropriation.”
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xii> [xii]

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

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

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

As noted in the Subcommittee report, in Glamis, the State Department noted
that state practice and opinio juris had established minimum standards of
treatment with regard to foreign investors and investment in only a few
areas. <http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xiii> [xiii]
Conversely, the State Department rejected Glamis’s assertion that the
minimum standard of treatment prohibits either conduct that frustrates an
investor’s expectations concerning an investment
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xiv> [xiv] or
“arbitrary” <http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xv> [xv]
conduct. Regarding Glamis’s claim that the minimum standard of treatment
required compensation for measures that adversely affect an investor’s
expectations, the State Department noted that such an interpretation was
both inconsistent with the no greater rights mandate and unsupported by
state practice. <http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xvi>
[xvi]

The asserted right to compensation for government measures that a tribunal
deems “arbitrary” would similarly provide greater rights than the comparable
standard under U.S. law. The Administrative Procedure Act does provide for
review of certain final agency actions under an “arbitrary and capricious”
standard of review. No comparable standard of review for economic
legislation has been available, however, since the 1930s, when the Supreme
Court abandoned the aggressive substantive due process review of the Lochner
era. <http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xvii> [xvii]
Although substantive due process review of economic legislation remains
theoretically possible, the post-Lochner standard is a highly deferential
“minimum rationality” review, pursuant to which legislation will be upheld
“unless in the light of the facts made known or generally assumed it is of
such a character as to preclude the assumption that it rests upon some
rational basis within the knowledge and experience of the legislators.”
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xviii> [xviii]

Not only would an international “arbitrary” standard of review for economic
legislation provide greater rights than the highly deferential standard of
review for substantive due process claims, it would also exceed the standard
of protection afforded under the domestic law of other developed countries.
The Supreme Court’s Lochner era jurisprudence, in fact, “stands as perhaps
the paradigmatic instance of an ‘anti-model’ of comparative constitutional
experience.” <http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xix> [xix]
Accordingly, we recommend that the new Model BIT codify the State
Department’s deferential interpretation of the minimum standard of
treatment.

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

The 2004 Model BIT contained several important clarifications concerning the
standard for “indirect expropriation.” Two provisions in particular are
significant: the language indicating that in order to constitute an
expropriation a measure must affect a property right,
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xx> [xx] and the
statement that “[e]xcept in rare circumstances, non-discriminatory
regulatory actions by a Party that are designed and applied to protect
legitimate public welfare objectives, such as health, safety and the
environment, do not constitute indirect expropriations.”
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xxi> [xxi]

Despite these reforms, however, there remains the potential that the
indirect expropriation provisions of BITs could be applied in a manner that
would violate the “no greater rights” principle by providing foreign
investors with greater rights than the comparable protections of the Takings
Clause of the Fifth Amendment of the U.S. Constitution.
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xxii> [xxii] For
example, the Model BIT permits tax measures to be challenged as violations
of the prohibition on uncompensated expropriations,
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xxiii> [xxiii] and
there is substantial precedent in international arbitral practice for
finding that tax measures can constitute forms of indirect expropriation.
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xxiv> [xxiv] Under the
Fifth Amendment’s Takings Clause, in contrast, the Supreme Court has
repeatedly rejected takings challenges to tax measures, even when the tax is
set at a level that threatens the viability of a business.
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xxv> [xxv]

The restriction of expropriation claims to situations involving “property”
as opposed to the more broadly defined “investment” is also inadequate to
ensure compliance with the “no greater rights” principle, because it does
not reflect that the requirement of compensation for “regulatory takings”
under the Fifth Amendment of the U.S. Constitution has generally been only
held to apply to regulations affecting real property.
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xxvi> [xxvi] For
example, the Supreme Court has indicated that personal property is unlikely
to be the basis for a successful regulatory takings claim given that “in the
case of personal property, by reason of the State's traditionally high
degree of control over commercial dealings, [the owner] ought to be aware of
the possibility that new regulation might even render his property
economically worthless.”
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xxvii> [xxvii]

Moreover, the indirect expropriation provision in investment agreements has
been interpreted to require compensation based on the impact of the
government measure on the value of the investment, regardless of whether
there has actually been some appropriation of an asset by the government.
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xxviii> [xxviii] This
interpretation of the standard for indirect expropriation cannot be
justified as reflecting the general practice of states, given that the
dominant practice of nations is to provide for compensation only when the
government has actually acquired an asset, not when the value of an asset
has been adversely affected by regulatory measures.
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xxix> [xxix]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

*                                 In Article 12.1, the language “shall
strive to ensure that it does not waive or otherwise derogate from” should
be replaced by a firm obligation: “shall not waive or otherwise derogate
from”. <http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xxx> [xxx] The
footnote to this article should be deleted to expand the scope of Article 12
to all environmental laws. 

*                                 The Investment and Environment Provision
should be subjected to State-to-State dispute settlement by deleting Article
37.5 and deleting the last sentence of Article 12.1.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

V. Preventing and Mitigating Financial Crises

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

Recommendations: 

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

There is a growing body of literature discussing the potential that measures
adopted by the United States and other countries in response to the
financial crisis will result in international legal disputes. Most of the
discussion thus far has focused on the potential for state-to-state trade
disputes pursuant to the WTO’s dispute settlement process.
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xxxi> [xxxi]

A recent study by Anne van Aaken and Jürgen Kurtz, however, concludes that
“international investment law is, in the short-term, more likely than any
other area of international economic law to give rise to complaint and
initiation of legal action” based on government measures adopted to address
the financial crisis.
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xxxii> [xxxii] Among
the factors the authors cite in support of this conclusion is the
availability of investor-state arbitration for investment claims, which
reduces the deterrent effect that the potential for retaliatory complaints
may have on state-to-state disputes over trade rule violations.

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

Accordingly, certain financial bailout measures could be challenged on the
grounds that they denied a foreign investor’s right to fair and equitable
treatment. For example, it could be argued that a foreign financial
institution operating in the United States was denied fair and equitable
treatment because it was not provided with access to the same bailout
programs as U.S. banks.
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xxxiii> [xxxiii] A
similar argument was made in an investor-state case against the Czech
Republic, in which a Dutch subsidiary of a Japanese bank successfully argued
that the Czech Republic had violated its right to fair and equitable
treatment by excluding a small bank in which it had invested from a bailout
program made available to larger Czech banks.
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xxxiv> [xxxiv]

2. We recommend that the administration also consider conducting a thorough
legal review of the “prudential measures” exception in the 2004 Model BIT.
Based on the outcome of these legal reviews, the U.S. government should
consider including a stronger prudential measures exception. Specifically,
the U.S. government should consider eliminating the arguably self-canceling
second sentence of Article 20.1, and including language indicating that the
prudential measures exception is self-judging (similar to the language in
the essential security provisions of recent FTAs).
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xxxv> [xxxv]

Article 20.1 of the Model BIT is aimed at protecting government actions to
secure the integrity and stability of its financial system from challenge.
However, a noted in the Subcommittee report, the second sentence of that
provision is unclear and could be interpreted in a manner that would
undermine the overall prudential exception.
<httphttp://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xxxvi> [xxxvi] It’s
worth noting that this potentially “self-canceling” sentence is absent from
an otherwise similar section of North American Free Trade Agreement (Article
1410.1). Yet even the NAFTA provision has been interpreted as permitting
tribunals to review financial measures to determine whether they are
“reasonable” or “arbitrary.”
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xxxvii> [xxxvii]
Accordingly, even if the second sentence of Article 20.1 is deleted,
language clarifying that the prudential measures exception is intended to be
self-judging is necessary unless the U.S. government intends to subject its
applications of the exception to review by investment tribunals.

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

Many noted economists and international institutions (such as the IMF)
recognize that while capital account liberalization may be a desirable goal
for some nations, the process should be gradual and sequenced. Even then,
there may be circumstances in which capital account management is necessary
to address massive inflows and outflows of short-term capital leading up to
and resulting from a financial crisis.
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xxxviii> [xxxviii] This
volatility also hurts U.S. investors in countries experiencing uncontrolled
massive capital flight, since it often leads to significant currency
depreciations, which could reduce the value of these investors’ host country
revenues and increase the cost of any imported inputs. However, the 2004
Model BIT essentially forces BIT partners to liberalize their capital
accounts, regardless of the nation’s institutional capacity -- or be
prepared to literally pay the consequences.

As noted in the Subcommittee report, IMF officials explained to members of
the Subcommittee that the IMF’s Articles of Agreement do not require member
states to obtain IMF approval before applying restrictions on capital
transactions. <http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xxxix>
[xxxix] An IMF official also stated that it is the official IMF board and
staff position that capital account liberalization needs to be sequenced and
that temporary exceptions to such liberalization may be needed in some
circumstances to prevent and mitigate financial crises—particularly to
regulate inflows and outflows of short-term capital. He also raised concerns
about a potential circumstance in which a country had a BIT with the United
States and elected to impose capital controls, because they would have to
apply the controls in a discriminatory way (not on U.S. investors but only
on those from other countries). The IMF official said that during the
negotiations for a Multilateral Agreement on Investment (MAI) the IMF
advocated for such an exception and was able to include a temporary
safeguard measure in the final draft of the MAI.
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xl> [xl]

The IMF has advised at least two countries to impose capital controls to
prevent or mitigate a crisis -- Estonia and Peru. Moreover, the IMF was
supportive of capital controls introduced by national governments in seven
of the twelve cases in the 1990s.
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xli> [xli] In the
current crisis, the IMF has been supportive of the capital controls deployed
by Iceland. <http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xlii>
[xlii]

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


TEMPORARY SAFEGUARD

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

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

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

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

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

Unlike the North American Free Trade Agreement, the U.S. Model BIT does not
explicitly exclude sovereign debt from the definition of covered
investments. <http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xliii>
[xliii] The U.S. government is the largest issuer of sovereign debt, and
recent steep increases in such debt levels have prompted the Chinese
government and other foreign investors to express concerns about the safety
of their investments in U.S. government debt. The risk of default is of
course much higher in the world’s poorest countries. The IMF has reported
that 28 countries have accumulated debt in excess of 60% of GDP as a result
of the current crisis.
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xliv> [xliv]

In the July 31, 2009 meeting with several members of the Subcommittee, a
senior IMF legal official raised concerns that efforts to restructure
unsustainable public debts may give rise to investor-state claims. The
prospect of another round of debt crises has renewed interest in developing
a permanent sovereign debt work-out procedure. A UN Commission on the
financial crisis, for example, stated that “There is an urgent need for
renewed commitment to develop an equitable and generally acceptable
Sovereign Debt Restructuring Mechanism.”
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xlv> [xlv] These
efforts, however, could be undermined if bondholders are able to circumvent
such mechanisms by filing claims under BITs. We note, however, that the debt
of state-owned enterprises (SOEs) should not be excluded from the definition
of investment under Article 1, as that result would provide an unfair
competitive advantage to SOEs with deleterious affects on U.S. competitors.

Some post-NAFTA U.S. trade agreements and bilateral investment treaties
include special annexes on debt restructuring.
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xliv> [xlvi] These
annexes are problematic for several reasons. First of all, they allow
investor-state claims over debt restructuring when such restructuring
violates National and Most Favored Nation treatment. There are several
reasons why a country might need to resort to offering preferential
conditions to domestic creditors in the aftermath of financial crises,
particularly when the domestic debt is associated with meeting wage, salary,
pension and other social obligations. Another problem is that these annexes
set a deadline of 270 days for governments to secure agreements with
creditors before investor-state claims can proceed. Experience shows that it
is difficult to bring all creditors together in one forum to obtain
agreement on a haircut across all bond issuance categories. This hard
deadline therefore may encourage foreign creditors to hold out for bigger
potential payoffs through investor-state claims than they might receive in a
negotiated restructuring.

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

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

Draft Language:

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

As investment flows into the United States continue to grow, it can be
anticipated that investment into the U.S. market will continue to expand
substantially. <http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xlvii>
[xlvii] Consequently, BITs can no longer be viewed solely as a package of
rights and obligations to protect outward investment by U.S. investors in
less developed nations. BIT obligations apply with equal force to
investments within the United States by foreign companies and governments,
including SOEs.

A Model BIT must address the impact on domestic competitiveness and
maintaining and creating jobs and technology in the United States. What is
good for America’s global corporations is no longer necessarily good for the
American economy. In particular, the consequences of inward investments made
by foreign SOEs on our domestic industries and workforce should be taken
into account. A Model BIT must ensure that such foreign nationals are not
permitted to gain an unfair competitive advantage in such acquisitions. A
BIT model should address significant domestic competitiveness issues to
balance these domestic interests with the interests of outbound investors.
This is especially the case when considering entering into BITs with
developing countries like China, which has massive reserves available for
foreign investment, is searching the globe to secure finite resources and
where at least half the production is in the hands of SOEs. China engages in
trade based on mercantilist principles and has a strategic industrial policy
meant to create and expand industrial sectors with the intent of becoming
dominant within China and globally. In fact, China has targeted ten sectors
or “pillars”, including steel, telecommunications and aerospace. To achieve
dominance, the Chinese government subsidizes home-grown enterprises
(commonly SOEs), manipulates its currency for export advantage and insulates
its domestic enterprises from foreign competitors in a host of ways. China
also uses access to its market as a means to force technology transfers. All
of these policies have one thing in common – they advance Chinese industries
often at the expense of foreign competitors. Certainly, such
anti-competitive policies have created disadvantages for U.S. companies
investing in China.
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xlviii> [xlviii]

There can be no reasonable expectation that China, or other countries with
similar industrial policies and significant SOEs, will on their own
initiative adopt inherently different or more market-based, hands-off
policies as they look to expand their economic prospects by investing in the
United States. Rather, it can be expected that countries like China will
seize the opportunity (and the insulation afforded under a BIT) to invest in
the U.S. market to advance the domination of their industries in the same
way as in their home countries. In either or both circumstances, such
policies also can distort competition in third country markets. Likewise, it
should be borne in mind that governments, particularly non-democratic ones,
may have more than pure commercial interests behind any particular foreign
investment decision. Indeed, in addition to the described industrial
policies, China has a “go out” strategy, which involves the purchase of
on-going, successful enterprises and brand acquisitions, in particular
involving finite and commercially critical resources like oil, gas and gold.
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#xlix> [xlix]

This raises at least two broad concerns involving SOEs investing in the U.S.
market under the protection of a BIT, which U.S. laws, such as anti-trust
law or the CFIUS regime, may not be amenable to addressing in a meaningful
manner. <http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#l> [l] First,
there is a potential problem with regard to SOEs that are subsidized by
their governments and likely to purchase productive assets in the U.S. under
the protection of a BIT. In that circumstance, an SOE could gain an unfair
advantage over similarly situated domestic competitors. For example, a
Chinese SOE may decide to purchase a manufacturing plant (a purchase
subsidized by the Chinese government) and may also export inputs from China
(subsidized by the Chinese government) to maintain and create jobs in China,
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#li> [li] or a
subsidized Chinese SOE could purchase an enterprise in the U.S. solely to
gain technology, which could be shipped back to China for future development
and control. In all of these instances, U.S. manufacturing capacity,
innovation and job creation could be adversely affected, thus undermining
our domestic competitiveness. As noted above, President Obama has spoken
eloquently on the need to rebuild a vibrant American manufacturing sector.

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

A new BIT model should strike a balance that ensures that foreign SOEs
operating in the United States do not import anti-competitive industrial
policies (e.g., subsidization) that result in the undermining of our
domestic competitiveness, productive capacity, innovation and job creation.
A BIT should not offer protection to SOEs that operate in such a manner but
rather provide meaningful disciplines to ensure open and fair competition in
the United States free from anticompetitive foreign government intervention.
<http://www.state.gov/e/eeb/rls/othr/2009/131118.htm#lii> [lii]

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

----- 

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

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

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

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

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

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

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

[vii] See Office of the United States Trade Representative, Bipartisan
Agreement on Trade Policy: Investment (May 2007), available at
http://www.ustr.gov/sites/default/files/uploads/factsheets/2007/asset_upload
_file146_11282.pdf

[viii]See Pennsylvania Fair Trade Coalition, 2008 Presidential Candidate
Questionnaire, answer of Sen. Barack Obama, question 10, available at
http://www.citizenstrade.org/pdf/QuestionnairePennsylvaniaFairTradeCoalition
040108FINAL_SenatorObamaResponse.pdf. Secretary of State Clinton also
endorsed the no greater rights principle during the 2008 campaign. See Texas
Fair Trade Coalition, Presidential Candidate Questionnaire, Answer of Sen.
Hilary Rodham Clinton, question 6 (“I will ensure that foreign companies do
not have greater rights than American companies.”), available at
http://www.texasfairtrade.org/documents/HillaryClintonQuestionnaireResponse.
pdf

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

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

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

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

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

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

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

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

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

[xvii][xvii] Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co.,
463 U.S. 29, 43 n.9. (1983) (rejecting suggestion that “the arbitrary and
capricious standard [under the APA] requires no more than the minimum
rationality a statute must bear in order to withstand analysis under the Due
Process Clause. We do not view as equivalent the presumption of
constitutionality afforded legislation drafted by Congress and the
presumption of regularity afforded an agency in fulfilling its statutory
mandate.”)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

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