Report of the Advisory Committee on. International Economic Policy. Regarding the Model Bilateral Investment Treaty. Presented to:

Transcription

1 Report of the Advisory Committee on International Economic Policy Regarding the Model Bilateral Investment Treaty Presented to: The Department of State September 30, 2009

2 INTRODUCTION The Advisory Committee on International Economic Policy ( ACIEP ) submits this report on the Model Bilateral Investment Treaty ( Model BIT ) in response to the request of the Department of State ( State Department ) and the Office of the United States Trade Representative ( USTR ). In June 2009, the State Department and USTR asked ACIEP to establish a Subcommittee to review the Model BIT, the template document that the U.S. uses as a starting point when contemplating the negotiation of a new BIT. The State Department and USTR asked that the Subcommittee devote attention, in particular, to three topics: (a) dispute settlement provisions; (b) state-owned enterprises; and (c) financial services issues. The State Department and USTR also asked that the Subcommittee s report be submitted in the fall of 2009 in time to be considered at an ACIEP meeting on September 30, A Subcommittee was formed under the co-chairmanship of Thea Lee, Policy Director of the AFL-CIO, and Alan Larson, Senior International Policy Advisor at Covington & Burling, LLP. The members of the Subcommittee include both representatives from ACIEP and other members of the private sector. The members are a diverse group of investment experts, with representation from business, academia, labor, environmental NGOs and the legal profession. The most recent private sector advisory report on the Model BIT -- completed in was a comprehensive, provision-by-provision review of the Model BIT. Though time precluded the review conducted by this Subcommittee from being as extensive, the deliberations did cover many of the same issues. Acknowledging the absence of significant convergence since the 2004 Report, the Subcommittee made the decision to both make recommendations and also expound on the various viewpoints. In addition to the Report on behalf of the whole, the particular viewpoints of several members of the Subcommittee have been annexed to this Report to provide a platform for the interests and suggestions that these individuals wished to bring to the attention of the Administration. Recognizing that investment policy has given rise to divergent positions, the Subcommittee members resolved to put a premium on collegiality and the search for common ground. Though it is likely that no member agrees with every statement in this Report, all members of the Subcommittee made valuable contributions to its preparation. Topics appear in the order in which they arise in the current Model BIT. The Subcommittee urges the Administration to reflect on these recommendations and observations as well as input from other persons as it reviews the Model BIT. Definition of Investment and Investor (Article 1) 1. Recognizing that certain types of nonprofit acquisitions abroad have the character of an investment as that term is defined in the current Model BIT, we recommend that the Administration consider confirming (in the Model BIT or elsewhere) the understanding that the Model BIT does accord BIT protections to such acquisitions. As an example, we highlight that the acquisition of property abroad for environmental purposes (e.g., acquiring property in a trust for environmental or ecological preservation) should enjoy BIT protections regardless of whether the acquirer had an expectation of profit. 1

3 Certain interests acquired and held for purposes other than profit or gain clearly have the character of an investment and, in our view, benefit from the protection of BITs. We believe that it is desirable for the Administration to consider how, to the extent practical, the understanding that the current Model BIT covers these investments should be reflected in the BIT or elsewhere. Care should be taken to ensure that such clarification does not inadvertently bring into question whether existing BITs already do extend coverage to these activities. 2. Recognizing that certain U.S. nonprofit enterprises, such as labor unions and environmental NGOs, can be investors when they make acquisitions that meet the definition of investment as those terms are defined in the current Model BIT, we recommend that the Administration review whether the current Model BIT language makes this sufficiently clear. Should the Administration s review prove it necessary, the Administration should take steps necessary to clarify the understanding that U.S. nonprofit enterprises can indeed be investors when they make or seek to make investments. We believe that, just as an interest held other than for profit or gain can be an investment benefiting from BIT protection, so too can non-profit groups such as labor unions and environmental NGOs be investors as that term is defined in the BIT. We believe that it is desirable for the Administration to consider how to clarify this point, if necessary. Minimum Standard of Treatment (Article 5) 3. Various members of the Subcommittee expressed a range of views on the minimum standard of treatment provision in the current Model BIT. Some members recommend codifying the current understanding of the content of the customary international law of the minimum standard of treatment. Other members recommend that the provision provide for fair and equitable treatment and full protection and security without reference to customary international law. The current Model BIT obliges a host Party to accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security. Discussions within the Subcommittee produced a range of views on how to define the fair and equitable treatment and full protection and security obligations, in particular, the link between those obligations and customary international law. A common concern was that, though the term customary international law is used frequently in the international legal community, there was little agreement in the international legal community as to its precise scope with respect to the minimum standard of treatment. Various members of the Subcommittee expressed different views on what the minimum standard of treatment obligation should entail as well as how that obligation should be defined. Some Subcommittee members believe the Administration should consider codifying the position taken by the State Department in a recent arbitral proceeding, Glamis Gold Ltd. v. United States. Regarding the content of the minimum standard of treatment under customary 2

4 international law, the State Department argued that state practice and opinio juris had established minimum standards of treatment in only a few areas and provided examples of those areas. The examples most relevant to the scope of the minimum standard of treatment provision of the current Model BIT were: i) the obligation to provide internal security and police protection to foreign investors and investment (i.e. full protection and security ); and ii) the obligation not to deny justice by engaging in notoriously unjust or egregious conduct in judicial or administrative proceedings (i.e. the Neer standard). These members recommend amending the BIT either to reflect that the interpretation of customary international law as it pertains to the minimum standard of treatment is the standard defined by those two articulated obligations or to refer directly to those obligations in the place of a reference to customary international law. Other Subcommittee members indicated their strong concerns that the 2004 Model BIT represented a step backwards in terms of protections provided for U.S. investors by tying the promised treatment to customary international law. This is because, in their view, the minimum standard of treatment as defined by customary international law only has been understood as providing fewer protections to investors than the fair and equitable treatment and full protection and security provisions as defined by international law in general (i.e., including but not limited to custom). These members also pointed out that most of the over 2,600 BITs worldwide do not link fair and equitable treatment and full protection and security to customary international law. In the view of these members, therefore, U.S. investors would be at a significant disadvantage and would have less protection than their foreign competitors. These Subcommittee members expressed the view that the fair and equitable treatment and full protection and security obligations were vitally important for all U.S. investors and could help ensure fairer treatment for U.S. investors competing abroad against local competitors, be they purely private entities, national champions or state-related enterprises. Therefore, these Subcommittee members recommend that the Administration return to either the language used in the 1994 Model BIT in Article II(3) 1 or otherwise provide that the fair and equitable treatment and full protection and 1 Article II (3) of the 1994 Model BIT read as follows: (continued ) (a) Each Party shall at all times accord to covered investments fair and equitable treatment and full protection and security, and shall in no case accord treatment less favorable than that required by international law. 3

5 security obligations be unqualified. That is, they should not be tied to or otherwise limited by reference to the minimum standard of treatment under customary international law. Other members of the Subcommittee believe that the 2004 Model BIT strikes an appropriate compromise between the two positions identified above. These members do not believe that U.S. investors have been prejudiced by the modifications to the minimum standard of treatment article made in post-nafta free trade agreements and in the 2004 Model BIT. Accordingly, these members support retaining the minimum standard of treatment article as it appears in the 2004 Model BIT. Transfers (Article 7) 4. In its review of financial services issues, the Subcommittee conducted extensive discussions on the Administration s free transfers policy and whether future BITs should include exceptions for balance of payments crises. The Subcommittee stands ready to continue to consult with the Administration on these issues, but was not able to reach consensus as to whether future BITs should include exceptions for balance of payments crises. Article 7 of the 2004 Model BIT obligates host governments to allow the free transfer of capital inflows and outflows, with limited exceptions. This language appears in U.S. BITs, as well as the BITs of most major trading nations. In 2004, the U.S. Model BIT was amended to include an exception to this and other provisions of the BIT (i.e., Article 20.1). Article 20.1 provides that a Party may adopt or maintain measures relating to financial services for prudential reasons even if such measures ordinarily would be inconsistent with the Party s obligations (including with respect to Article 7). Article 20.2 provides a more limited exception, allowing non-discriminatory measures to be taken by public entities for monetary and related credit policies and exchange rate policies notwithstanding any of the obligations ordinarily applicable under the BIT, except those relating to transfers and performance requirements. The Subcommittee held extensive discussions, including consultations with outside experts on the appropriateness of, and potential need for, an exception to the Article 7 transfers provisions, in particular, a balance of payments exception that would allow governments to impose capital account restrictions for balance of payment reasons. Such measures would affect financial and non-financial firms alike. The Subcommittee extensively considered different proposals, such as that proposed during the Multilateral Agreement on Investment negotiations (that would permit an exception for prudential, temporary, good-faith, and non-discriminatory limits on capital account transfers), the provisions currently included in Articles XI and XII of the General Agreement on Trade in Services ( GATS ) that would permit a temporary, nondiscriminatory and good faith application of a balance of payments safeguard, as well as (b) Neither Party shall in any way impair by unreasonable and discriminatory measures the management, conduct, operation, and sale or other disposition of covered investments. 4

6 member-developed proposals to make such an exception self-judging and not subject such measures to investor-state dispute settlement. Despite extensive discussions, Subcommittee members were unable to reach a consensus. Some Subcommittee members advocated that, in light of the current financial crisis, restrictions on capital transfers in the U.S. Model BIT need to be revised to provide greater flexibility to governments to tame massive capital inflows and outflows leading up to or stemming from a financial crisis, that would otherwise destabilize developing countries. They emphasized as well their concern that the lack of a balance of payments exception in the U.S. Model BIT differentiates it from the IMF Articles of Agreement that permit capital account restrictions and that certain economists and international institutions (such as the IMF) have recommended capital account liberalization through a gradual and sequenced process. These members advocated for the adoption of a balance of payments exception that would be applied on a temporary, non-discriminatory basis, and not be subject to investor-state dispute settlement. Other Subcommittee members advocated that Article 7 not be further weakened, noting that, in their view, the 2004 Model BIT already provides extensive flexibility to countries through Articles 20.1 and These members oppose including a broader exception allowing for capital controls for balance of payments purposes in the U.S. Model BIT. These members noted that such an exception is generally not included in the BITs of the United States major trading partners. These members emphasized their view that capital account liberalization promotes economic growth, development and higher standards of living. They also explained their view that capital controls reduce the efficiency of the financial system; lead to more political, rather than equitable, distribution of credit and resources; slow development; discriminate against small credit-constrained businesses and will likely slow needed macroeconomic reforms since such controls generally address only the symptom (rapid outflows), not the underlying cause, of financial crises. In addition, these Subcommittee members stressed that it is unnecessary and undesirable to tie U.S. BITs to the IMF Articles of Agreement or the GATS, as such agreements, like most multilateral agreements, represent a floor for investor protection. These Subcommittee members believe the U.S. should seek greater protection for U.S. investors than the IMF Articles of Agreement or the GATS afford. In addition, these members noted that in Subcommittee meetings with the Treasury Department, representatives of the Department indicated that, even in light of the recent financial crisis, they did not feel that their ability to act was constrained by any obligations under BITs to which the U.S. is a party, and, therefore, that no amendment for balance of payment purposes was, in their view, necessary. Performance Requirements (Article 8) 5. The Subcommittee considered the appropriateness of broadening the prohibition against performance requirements to encompass requirements that (a) research, development, testing, innovation, systems integration or other activity aimed at generating intellectual property be performed in the territory of a host Party; or (b) that technology developed in the territory of a host Party be required to be used by an investor as a condition for any investment or investment approval. Other members proposed a further broadening that would prohibit requirements that preference be given to services of a host Party. 5

7 The Subcommittee discussed proposals to expand the performance requirements obligations in the Model BIT to cover more comprehensively services and technology and intellectual property based performance requirements. Some members noted that the Model BIT contains extensive provisions prohibiting host countries from imposing domestic mandates (such as requiring a certain level of exports or domestic purchases) on foreign investors or conditioning access to regulatory advantages on an investor s compliance with specified requirements. To ensure that countries do not use performance requirements to undermine U.S. interests, some Subcommittee members urged an expansion of the performance requirements prohibitions to government action requiring an investor to purchase or use or accord a preference to domestically produced services, intellectual property and technology. Such performance requirements, these members argued, are trade-distorting as they undermine the development of services and technology in the United States or elsewhere in favor of the policies of the country imposing the requirements. Other Subcommittee members also urged a broadening of the performance requirement provisions to include services as was provided for in NAFTA, Article 1106(1)(c), by modifying both Article 8.1(c) and Article 8.2(b). Other Subcommittee members expressed concern that broadening the performance requirements provisions would further undermine the ability of governments to ensure that foreign investment supports sustainable development. These members recommended that the existing performance requirements in the Model BIT be eliminated. These members felt that the Model BIT should neither restrict in any way the ability of developing countries to pursue their national development goals, nor the ability of all countries to combat climate change. These members noted that both developed and developing countries have deployed performance requirements in a variety of settings. They stated that performance requirements are currently most used by developing countries, including Brazil, China, India and others. These Subcommittee members referenced econometric evidence that supports their assertion that performance requirements can help nations meet their national development goals. 2 They referenced other theoretical studies that supported their assertion that performance requirements can increase home welfare where oligopolies are present. Transparency (Article 11 and Article 28) 6. Recognizing that words such as to the extent possible in Article 11(2), wherever possible from Article 11(4)(a) and words when time, the nature of the proceeding, and the public interest permit from Article 11(4)(b) could be abused in order to prevent the transparency that is important for investment, we recommend that the Administration consider the creation of a Transparency Council that could help the Parties to a BIT make continuing progress in this area. 2 See Kumar, Nagesh (2005), Performance Requirements as Tools of Development Policy: Lessons from Developed and Developing Countries, Putting Development First, Kevin P. Gallagher (ed), London: Zed Books. 6

8 Transparency with respect to the rules and processes regarding business is an important part of the rule of law. We are aware that the transparency provisions of the BIT are valuable to U.S. investors. It is striking that many of the transparency provisions of the BIT are hedged or qualified. We understand that the qualifying language is necessary given the uncertainties of the legislative process in the United States and elsewhere and given the need for exceptions to transparency in rulemaking to deal with emergencies, national security and other circumstances. However, there is a risk of countries abusing qualifying language when it comes to transparency obligations. We encourage the Administration to review its own rulemaking practices to ensure maximum transparency and to consider the creation of a Transparency Council, which would advise the Parties to a BIT on steps that could maximize the transparency of the rule-making processes for the benefit of foreign investors. 7. We recommend the Administration consider the insertion of the following provision into Article 11: Each Party shall allow persons of the other Party to participate in the development of standards, technical regulations, and conformity assessment procedures that affect investors and to do so on terms no less favorable than those it accords to its own persons. When non-governmental bodies carry out the foregoing activity, each Party shall recommend that such non-governmental bodies in its territory observe this obligation in developing standards and voluntary conformity assessment procedures. This provision, which is a modified version of language found in the U.S.-Korea FTA, is designed to give investors and other persons opportunities to participate in standards setting procedures on a non-discriminatory basis. We understand that the term persons includes both natural persons and organizations, including businesses and NGOs. Some Subcommittee members expressed some concern about the appropriateness of including all persons, not just investors, in this provision. Others pointed out the difficulty in identifying what standards would be affected by this obligation in other countries. 8. We recommend that the Administration consider, with respect to amicus curiae submissions, following the example of the ICSID Arbitration Rules. To this end, Article 28(3) could be replaced with the following language: A person or entity that is not a party to the dispute (an amicus curiae ) that brings to the attention of the Tribunal relevant matters not already brought to its attention by the parties may be of considerable help to the Tribunal. After consulting with the Parties, the Tribunal may permit such persons or entities to file a written submission with the Tribunal regarding a matter within the scope of the dispute. 7

9 In determining whether to allow a filing, the Tribunal shall consider, among other things, the extent to which: (a) the amicus curiae submission would assist the Tribunal in the determination of a factual or legal issue related to the proceeding by bringing a perspective, particular knowledge or insight that is different from that of the disputing parties; (b) the amicus curiae submission would address a matter within the scope of the dispute; (c) the amicus curiae has a significant interest in the proceeding. The Tribunal shall ensure that the amicus curiae submission does not disrupt the proceeding or unduly burden or unfairly prejudice either party, and that both parties are given an opportunity to present their observations on the amicus curiae submission. In light of the important role of amicus briefs in providing for appropriate citizen participation in the dispute settlement process, we believe it useful to better provide for such submissions in the current Model BIT. Many members believed that Rule 37(2) of the ICSID Arbitration Rules provides an ideal template that should be extended to the other fora in which investor-state disputes under a BIT are brought. Some members agreed but believed that the above language still does not provide a strong enough encouragement to tribunals to accept amicus curiae submissions and felt the Administration should make additional efforts with ICSID (and other fora) to create even more openness. As a separate matter, some members believed the Model BIT should continue to provide, as the 2004 Model BIT does in Article 28.2, that the non-disputing State Party to the BIT, as a matter of right, is allowed to make oral and written submissions to the tribunal as to the interpretation of the BIT. This right has been provided for under all recent U.S. BITs and trade agreements providing for investor-state dispute settlement. Investment and Environment (Article 12) 9. The investment and environment provision introduced by the 2004 U.S. Model BIT contains aspirational language. The Subcommittee supports efforts to promote improvement in environmental standards and protections in potential BIT partners, and extensive discussions were held as to the appropriate approaches by which to accomplish these goals. Added in the 2004 Model BIT, the environment provision of the current Model BIT contains largely aspirational language. It states that host countries should strive not to weaken or derogate from their environmental laws to encourage investment. This language is subject to consultations but not to formal dispute settlement. 8

10 Some Subcommittee members believed that the Model BIT 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. They noted that the current environmental provision only contains hortatory and aspirational language that stands in stark contrast to the mandatory and enforceable obligations established by other provisions of the Model. In order to address some aspects of this limitation, these Subcommittee members suggested two changes to this provision: first, that Article 12(1) be revised to establish an enforceable legal obligation, subject to state-to-state dispute settlement, requiring States to refrain from derogating from environmental laws to attract investments; second, that Article 12(2) be revised to establish an exception for measures related to the protection of human, animal, or plant life or health, or to the conservation of natural resources. It is their view that, 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 commercial concerns. The first revision proposed by these Subcommittee members follows the U.S.-Peru Trade Promotion Agreement, as well as pending trade agreements with South 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. 3 Some members of the Subcommittee proposed that this commitment should be extended to (i) any international agreements (not just treaties) and (ii) all such agreements to which the two Parties are signatory, whether bilateral or multilateral. These agreements also subject this commitment to dispute settlement mechanisms similar to those available for commercial disputes, thereby ensuring parity between commercial and environmental obligations. The second proposed revision follows Article XX of the General Agreement of Tariffs and Trade (GATT), as well as the BIT program of Canada and recent BITs entered into by countries like India, New Zealand and Singapore. This revision would establish an environmental exception, ensuring that each BIT partner retains the ability to respond to health, safety, and environmental threats and provide protection to its people and environment, without risking liability under the BIT. The Subcommittee members who supported strengthening the environmental provisions in the Model BIT took issue with concerns raised by other Subcommittee members that including enforceable environmental provisions in future BITs would either make it impossible to negotiate such agreements or create a competitive disadvantage for the United States. They pointed out that many provisions of U.S. BITs -- including investor-state dispute resolution, constraints on performance requirements, and financial services obligations, among others -- are difficult to negotiate with developing country partners, so that alone cannot be a reason for omitting these particular provisions from the Model BIT. They noted that it is also the case that 3 For greater clarity, 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. 9

11 there are many BIT provisions sought by U.S. investors that are not routinely included in other countries BITs, so, in their view, the competitiveness concern should not be invoked solely and asymmetrically to oppose inclusion of labor and environmental provisions. Other Subcommittee members did not believe that it was appropriate or feasible to expand the BIT scope to include extensive environmental obligations subject to dispute settlement. These members expressed strong concern that the attempt to negotiate, let alone bring into force, an agreement with obligatory environmental provisions would effectively result in the cessation of an active BIT program for the United States. In their view, potential BIT partners would not negotiate such a provision or be able to make the major changes to their environmental regimes that would be required for such an agreement to take effect. These Subcommittee members emphasized their viewpoint that while substantive obligations regarding the environment may be negotiable in the context of a free trade agreement (where there is room for trade-offs in areas beyond investment), the negotiating dynamics of BITs are more limited, providing, in the end, less flexibility. These members indicated their view that requiring binding new environmental commitments will further push back the U.S. BIT program in ways that will aid U.S. competitors at the expense of U.S. investors. They noted that few other countries include environmental provisions in their BITs and point out that, unlike other BIT provisions where there are differences between the approach that the United States and other countries take, environmental standards represent an entirely new set of standards that is different from what is contained in most other BITs. Furthermore, these members expressed the view that BITs promote greater foreign investment and such investment is itself important to promote expanded economic opportunities and raise living standards in developing countries, which has the potential to result in those countries adopting higher environmental standards. These members also opposed the introduction of a new GATT XX-like exception for measures relating to the environment as being neither appropriate nor necessary. These members believed there was the potential for countries to take advantage of such exceptions to shield unfair, arbitrary, discriminatory and expropriatory actions. They noted that such an exception is not included in most of the BITs of other countries nor, as a general matter, does the United States maintain exceptions for its own health, safety, and environmental measures from some of the basic due process protections of domestic law. They also noted that any such exception would have to take account of the underlying obligations to which it could apply. For example, the performance requirements obligation already provides an exception for certain environmental measures. Noting that, by definition, an expropriation must be for a public purpose in order to be consistent with the BIT, these Subcommittee members expressed the view that the obligation to pay prompt, adequate, and effective compensation should not depend on the nature of the underlying public purpose justifying the expropriation. It was their view that if, in exceptional circumstances, a State wanted to retain the right to adopt environmental measures that would ordinarily be inconsistent with certain BIT obligations, then the State should include those measures in its non-conforming measures annexes as provided in Article 14. However, they cautioned that broad exceptions may undermine other important U.S. policy goals, including the promotion of new and innovative technology and the support of high-paying domestic jobs, especially if foreign countries are permitted to expropriate (without compensation) U.S. environmental technologies and intellectual property. 10

12 10. Some Subcommittee members recommend that the Administration consider the creation of a bilateral Environmental Council that would offer advice on BIT-related environmental issues. Some Subcommittee members recommend that the Administration consider the creation of a bilateral Environmental Council as a tool to promote improved environmental protections, cooperation and technical assistance and greater consultation and resolution of environmental issues. These Subcommittee members believe that a tripartite structure, which would include the participation of government officials, environmental groups from both countries and business representatives from both countries, would promote a productive forum. Other Subcommittee members do not believe that it is necessary or desirable to create such Environmental Councils. Investment and Labor (Article 13) 11. The investment and labor provision introduced by the 2004 U.S. Model BIT contains aspirational language. The Subcommittee supports efforts to promote improvement in labor standards and protections in potential BIT partners, and extensive discussions were held as to the appropriate approaches by which to accomplish these goals. Like the environment provision, the labor provision of the 2004 Model BIT contains largely aspirational language on labor matters. It states that host countries should strive not to weaken or derogate from their labor laws to encourage investment. This language is subject to consultations but not to dispute settlement. Some Subcommittee members expressed strong support for strengthening the labor provisions in the Model BIT. These members believed that requiring uniform adherence to a common, universal set of internationally recognized labor rights should be an integral part of all U.S. investment agreements. They believe that the exploitation of workers who are unable to exercise fundamental human rights, such as the right to form a union or engage in collective bargaining, artificially suppresses labor costs and may thus have a direct impact on investment decisions. These Subcommittee members firmly believe that the protection of core labor rights is just as critical to mutually beneficial investment flows as the protection of property rights and thus disagree with the view that including enforceable labor provisions is inappropriate for a BIT. These Subcommittee members recommend that the Administration require a party to a BIT to adopt and maintain in its laws and regulations the ILO core labor rights and to effectively enforce them, as well as to effectively enforce laws regarding acceptable conditions of work. They also recommend that dispute resolution mechanisms be as available and effective for labor provisions as they are for the other commercial commitments found in the BIT. Some of these Subcommittee members suggested that Article 13(1) could be revised to reflect the approach adopted in the May 10th Administration-Congressional Trade Deal (reached by the Bush Administration and House Leaders) in Chapter Seventeen of the U.S.-Peru Trade 11

13 Promotion Agreement. The U.S.-Peru Trade Promotion Agreement and pending trade agreements with South Korea, Panama, and Colombia contain a commitment by parties to adopt and maintain in their domestic labor laws and regulations the core labor rights as stated in the 1998 ILO Declaration, as well as a commitment to effectively enforce those laws and not to derogate from their labor laws to encourage trade or investment. Finally, they proposed that this commitment should be subject to state-to-state dispute settlement. On the other hand, other Subcommittee members believed that the Peru TPA language was insufficient. Among other concerns, they noted that the reference to the ILO Declaration, as limited by footnote 2 of the Peru TPA, introduces uncertainty into the scope of the obligation. On this point, these members recommended instead an explicit reference to the eight ILO core conventions. The Subcommittee members who supported strengthening the BIT s labor provisions disagreed with concerns raised by other Subcommittee members that including enforceable labor provisions in future BITs would either make it impossible to negotiate such agreements or create a competitive disadvantage for the United States. They noted that many provisions of U.S. BITs including investor-state dispute resolution, constraints on performance requirements, and financial services obligations, among others -- are difficult to negotiate with developing country partners, so that alone cannot be a reason for omitting these particular provisions from the Model BIT. They pointed out that all ILO member states have already agreed to respect, promote and realize the core labor standards. Finally, they indicated that there are many BIT provisions sought by U.S. investors that are not routinely included in other countries BITs, so, in their view, the competitiveness concern should not be invoked solely and asymmetrically to oppose inclusion of labor and environmental provisions. Other members did not believe that it was appropriate or feasible to expand the BIT scope to include extensive labor standards subject to dispute settlement. These members expressed strong concern that the attempt to negotiate, let alone bring into force, an agreement with either the May 10th language or the stronger language based on ILO conventions would effectively result in the cessation of an active BIT program for the United States, as potential BIT partners would not negotiate such a provision or be able to make the major changes to their labor regimes that would be required for the agreement to take effect. These members agreed that the ILO Declaration language was vague and also pointed out that the United States has not ratified six of the eight ILO core conventions, in significant part because of differences in the ILO approach and the specifics of U.S. labor law. Some Subcommittee members also emphasized that while substantive obligations regarding labor may be negotiable in the context of an FTA (where there is room for trade-offs in areas beyond investment), the negotiating dynamics of BITs are more limited, providing, in the end, less flexibility. These members also noted that the United States is the only major country that has ever included any labor standards language in its BITs and indicated that requiring binding new labor commitments will further push back the U.S. BIT program in ways that will aid our competitors, but not the United States. Unlike other areas of the BIT, where the approach taken by the United States and other countries differs, labor provisions would represent an entirely new set of standards beyond the scope of present-day BITs. Furthermore, these members noted their view that the greater foreign investment that BITs promote is vital to promote greater economic opportunities and raise living 12

14 standards in developing countries which many studies show results in those countries adopting higher labor standards Some Subcommittee members recommend that the Administration consider the creation of a bilateral Labor Council that would offer advice on BIT-related labor issues. Some Subcommittee members recommend that the Administration consider the creation of a bilateral Labor Council as a tool to promote improved protections for labor standards, cooperation and technical assistance and greater consultation and resolution of labor issues. These Subcommittee members believe that a tripartite structure based on the ILO model -- including the participation of government officials, labor groups, and business representatives from both countries -- would promote a productive forum. Other Subcommittee members do not believe that it is necessary or desirable to create such Labor Councils. Essential Security (Article 18) 13. We recommend the Administration consider amending Article 18 to provide that a Party should not apply measures otherwise inconsistent with its BIT obligations to advance predominantly economic objectives and that in having recourse to measures to protect its essential security interests a Party will be guided by principles of nondiscrimination for entities in like circumstances, transparency and predictability, regulatory proportionality and accountability, as the United States has agreed in the OECD. Recognizing that the essential security exception may sometimes be relied upon for specious reasons, we believe it may be useful to spell out in the Model BIT criteria guiding its use. We believe that the essential security exception should not be relied upon to justify BITinconsistent measures adopted to advance predominantly economic objectives. As well, measures adopted for the protection of the Party s essential security should accord with the principles the United States and other OECD countries have adopted with respect to the invocation of national security in the context of inward investment. These OECD principles include proportionality, transparency, and accountability. 5 4 See David Dollar and Aart Kraay, Trade, Growth, and Poverty, IMF (2002); Eric V. Edmons and Nina Pavcnik, "International Trade And Child Labor: Cross-Country Evidence," Journal of International Economics, 2006 (68), p. 115; Keith E. Maskus, "Should Core Labor Standards Be Imposed Through International Trade Policy?" Policy Research Working Paper no. 1817, The World Bank, August 1997, p [I]f governments consider or introduce investment policies (including measures) designed to safeguard national security, they should be guided by the principles of non-discrimination, transparency of policies (continued ) 13

15 Some members of the Subcommittee did not believe that a Party s reliance on the essential security exception should be subject to investor-state dispute settlement. In other words, they believed that if a Party s measure is the subject of an investor-state claim and the Party invokes essential security as a defense, that invocation should cause the arbitration to be terminated. They indicated that they did not believe there would be support for tribunals passing judgment on whether a government s invocation of essential security was legitimate. These members do believe that the question of whether a government s invocation of essential security is legitimate should be subject to state-to-state dispute settlement. Other members of the Subcommittee hold the position that the question of whether a country s reliance on the essential security exception is consistent with the BIT or not should be subject to investor-state dispute settlement. This group believes that putting invocations of essential security beyond review will allow governments to evade their BIT obligations. Many of these members also recommended that the words "that it considers" (which were inserted in the 2004 Model BIT but not contained in the earlier 1994 Model BIT) be eliminated. It was their belief that the addition of these words makes this provision subjective (i.e., self-judging) rather than objective.. They felt maintaining in the 2004 Model BIT what they believed to be selfjudging language puts at risk major U.S. investments overseas by essentially permitting foreign governments to invoke this exception for specious reasons while rendering a claim largely, if not wholly, unreviewable. Financial Services (Article 20) 14. Some members of the Subcommittee recommend that the Administration in future investment negotiations seek to ensure that U.S. financial institutions and investors of a Party, or covered investments, in financial institutions are not denied access to investorstate dispute settlement provisions with respect to alleged breaches of the national treatment and most-favored nation treatment obligations of the BIT. Others recommend that the government conduct an internal risk assessment with respect to these provisions to ensure that the review the government previously conducted on this issue still stands in light of the financial crisis. That review reached the conclusion that a claimant should be permitted to submit to investor-state dispute settlement claims of breach of the national treatment and MFN obligations with respect to financial services. The 2004 Model BIT allows an investor to submit to investor-state dispute settlement a claim that a host Party measure breaches its national treatment or most-favored nation obligations. Nevertheless, some recent investment treaties and trade agreements preclude such claims with respect to measures relating to financial institutions. The U.S.-Rwanda BIT, signed in February 2008 and awaiting ratification by the Senate, marked a return in U.S. policy to consistency with the 2004 Model BIT. Under that policy, and as reflected in the 2004 Model and predictability of outcomes, proportionality of measures and accountability of implementing authorities. Guidelines for Recipient Country Investment Policies Relating to National Security, adopted by the OECD Council on 25 May

16 BIT, a claim by an investor that a measure relating to financial institutions breaches the national treatment or most-favored nation obligations may be submitted to investor-state dispute settlement. This return to a policy consistent with the 2004 Model BIT was made after an extensive internal Administration review of the benefits and potential risks associated with the earlier policy of carving out and precluding such claims from being submitted to investor-state dispute settlement. Against this backdrop, some on the Subcommittee recognize the importance of ensuring enforceable non-discriminatory treatment of U.S. investment overseas, including financial services investments. Those Subcommittee members also recognize that precluding arbitration of claims involving discrimination against financial institutions and investments would put U.S. investors at a competitive disadvantage with competitors from other countries that do not have this limitation in their BITs. Accordingly, those Subcommittee members recommend that the Administration negotiate future BITs, as provided for in the 2004 Model BIT, to permit national treatment and most favored nation claims involving measures relating to financial institutions to be submitted to investor-state dispute settlement. Others on the Subcommittee recommend that, in light of recent measures undertaken to address the financial crisis, the Administration conduct an additional internal risk assessment with respect to these provisions notwithstanding the major risk assessment that the Administration did at the time of the Rwanda BIT. 15. We recommend that the Administration undertake a legal review of the second sentence in Article 20.1 and weigh the costs and benefits of clarifying or deleting it. The Subcommittee examined the prudential exception in Article 20.1 of the 2004 Model BIT and particularly the second sentence of that provision, which is taken from the General Agreement on Trade in Services Annex on Financial Services. 6 Some Subcommittee members are concerned that the language is unclear and could be misinterpreted in a manner that would undermine the overall prudential exception. Others see it as a provision that seeks to prevent the misuse of the prudential exception for non-prudential reasons. The Subcommittee, therefore, recommends that the Administration undertake a legal review of this provision and determine whether it would be appropriate to clarify or possibly delete the language. The Subcommittee believes that, if a clarification is deemed necessary, any such clarification can and should be made in a manner that does not undermine or change the meaning of this provision to prevent efforts by governments to use this provision to shield disguised restrictions on trade or investment. Dispute Settlement (Section B) 6 See paragraph 2(a) of the Annex on Financial Services: 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. 15

17 16. The Subcommittee conducted extensive discussions on dispute settlement, especially investor-state dispute settlement. Though the deliberations did not converge upon a recommendation, they provided valuable insight into the issues involved. In Section B, the 2004 Model BIT provides for investor-state dispute settlement. Investor-state dispute settlement is the mechanism by which a foreign investor may submit to arbitration claims that a host country has breached its BIT obligations or obligations under an investment agreement (a particular type of contract between an investor and a host Party as defined by the Model BIT) and thereby injured the investor. Investor-state dispute settlement produced some of the most robust discussions among the Subcommittee members. Some Subcommittee members strongly support investor-state dispute settlement. These members noted that such provisions are contained in virtually all of the over 2,600 BITs around the world and argued that they provide an objective, fair and non-politicized forum in which investors overseas can seek redress for treaty breaches (and sometimes contract breaches) by foreign countries, including discriminatory treatment, uncompensated expropriation, and denials of fair and equitable treatment. These members emphasized that for over thirty years, under five presidents (three Republicans, two Democrats), the U.S. Bilateral Investment Treaty program with investor-state dispute settlement at its core, has been a tool for promoting U.S. economic interests at home and abroad. These Subcommittee members believe that, without investor-state provisions, U.S. investors would be left at a competitive disadvantage, particularly in the many countries with which U.S. competitors have BITs and the United States does not. These members also asserted that investor-state dispute settlement is vital to help ensure that U.S. investors abroad benefit from legal protections similar to those found under the U.S. Constitution, and federal and state law -- protections which are available to U.S. and foreign investors alike. In the view of these members, BITs help promote more secure investments in developing countries (including access to scarce natural resources) that, in turn help spur economic development, decrease poverty and promote stability and the rule of law. These members also believed it was inappropriate to limit disputes concerning investment treaty protections to state-to-state dispute settlement. It was their view that by doing so, an investor s disputes with a host State are subject to the particular political interests of the investor s home State. Such interests include not only defensive interests of the home State but also interests related to bilateral relations between the two countries. They believed that, in such cases, an investor s interests in the dispute would not be adequately represented by the investor s home State. Other Subcommittee members strongly believe that the international dispute resolution mechanism provided in the Model BIT poses significant risks to the public interest. They were concerned that international arbitrators may lack expertise in and understanding of local laws and societal values and, where these laws and values are at the heart of an investment dispute, the arbitration panels decisions risk undermining the domestic laws and values. They believed that where investment disputes raise constitutional questions, such as the allocation of powers among governmental organs or permissible limitations of property rights, the principles of democratic accountability require that domestic courts adjudicate such disputes whenever possible. It was their view that when international dispute resolution is appropriate, the Model BIT should provide for state-to-state dispute settlement. They believed that state-to-state dispute settlement guarantees the crucial role of governments in determining and protecting the public interest. In 16