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Positions and Statements

 

USCIB Comments on the Preliminary Draft Text of the FTAA Agreement

 

August 21, 2001

 

Ms. Gloria Blue

Executive Secretary

Trade Policy Staff Committee

Office of the U.S. Trade Representative

1724 F Street, N.W.

Fifth Floor

Washington, D.C.  20508

 

Dear Ms. Blue:

 

This is in response to the Federal Register notice of July 12, 2001, soliciting comments on the preliminary draft consolidated texts of the Free Trade Area of the Americas (FTAA) Agreement and the FTAA Technical Committee on Institutional Issues.  On July 29, 1999 and February 7, 2000, the United States Council for International Business (USCIB) sent to USTR our recommendations for the negotiations in several specific areas.  Those recommendations still stand, but we have revised or updated our positions in the following areas to reflect developments since our previous letters.

 

 

BIOTECHNOLOGY

 

In previous submissions, USCIB stressed the importance of stepping up scientific and technical exchanges at all levels to ensure that regulatory regimes are based on scientific principles. Proactive steps must be undertaken by governments not only to educate their publics to the realities of new scientific developments in the rapidly evolving fields of genetics and biotechnology, but also to anticipate problems in this field.

 

Thus, the United States should use the FTAA process to promote the formulation of national regulations governing food safety and animal and plant health that minimize the chance of their being used to protect domestic economic interests and restrict market access.  While biotechnology products have been found to be substantially equivalent to products that have not been created through recombinant DNA techniques, many countries have created barriers to trade either through questionable Sanitary and Phytosanitary (SPS) claims, non-tariff barriers, or technical barriers to trade (e.g. labeling requirements).

 

By further reinforcing and reiterating sound science as the basis for decision-making, as well as supporting the process of dispute settlement through increased mechanisms to ensure compliance, FTAA countries will be able to tap more effectively the numerous benefits that biotechnology can deliver.

 

 

COMPETITION POLICY

 

While it is difficult to comment on a draft text that is so bracketed, we request U.S. negotiators to consider the following general suggestions and views.  We hope that these principles will result in a shorter, simplified chapter on competition policy.

 

·         In general, U.S. negotiators should not agree to anything in the FTAA that would require implementing legislation to amend existing U.S. antitrust laws.  We have good laws that certainly meet any hemispheric standards that might appropriately be established in an FTAA. 

 

·         The current draft text resembles an outline of an antitrust code, which is undesirable.   U.S. businesses could possibly accept an obligation on FTAA governments to have and enforce laws that seek to prevent private anticompetitive practices, including hard core cartels that impede market contestability.  Such obligations, however, should not include enforcement obligations regarding abuse of a dominant position and other unilateral business conduct theories that do not relate closely to market access -- the primary nexus between competition law and the overall trade objectives of FTAA.  Analysis of unilateral conduct requires complex rule-of-reason analysis that often places excessive burdens on enforcement authorities with little experience and resources.  Rules on single-firm conduct are especially rife with potential for strategic use by competitors seeking to obstruct rivals for private business reasons, rather than legitimate competitive process concerns.  Moreover, regardless of enforcement experience or resource levels, enforcement errors in this area can be costly, resulting in less market access and reduced incentives to invest and innovate.

 

·         FTAA member countries should implement and enforce rules regarding official monopolies and state enterprises.  Those rules should ensure that state participation in commercial activity does not result in discrimination against FTAA trading partners or against firms located in FTAA member countries.

 

·         In general, government regulatory behavior should be addressed in the FTAA not under the heading of competition policy, but under other headings as appropriate, e.g., government procurement, subsidies, IP protection, etc.

 

·         FTAA member countries should fully adhere to safeguards applicable in each jurisdiction to protect confidential business information. 

 

·         The agreement should stress the importance of independent appellate review of actions taken by competition authorities.

 

·         FTAA commitments on competition policy should not be subject to formal FTAA dispute settlement, but rather should be subject to a government-to-government consultative mechanism.

 

·         To ensure the development of effective and consistent competition policy,  cooperation among FTAA countries should be encouraged through mechanisms such as technical assistance on competition policy and law enforcement, and a competition policy peer review mechanism.

 

 

INTELLECTUAL PROPERTY

 

Intellectual property rights (IPR) -- patents, copyrights, trademarks, and trade secrets -- are essential to economic development and are therefore a critical component of the FTAA negotiations.

 

Although many nations of the Western Hemisphere have made substantial progress in the protection and enforcement of IPR, others have failed to implement their trade obligations with respect to intellectual property.  The FTAA should require full compliance with existing intellectual property accords.  In particular, FTAA negotiating partners who have not yet fully implemented the agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs) should be required to do so before the FTAA enters into force.

 

With many higher value-added economic activities increasingly dependent on IPR, the FTAA must help ensure that intellectual property standards continue to improve in order to encourage, reward and protect innovation and creativity.  Accordingly, the FTAA should contain standards of intellectual property protection and enforcement that build on and strengthen the rights defined by TRIPS and the North American Free Trade Agreement.  Although the current draft FTAA text includes language that seeks to improve on the protections stipulated by those two agreements, the text also includes language -- albeit bracketed – that seeks to weaken intellectual property protection.  U.S. negotiators should make clear that such language is an unacceptable basis for proceeding in the negotiations. 

 

With these considerations in mind, we believe that the FTAA should:

 

·         Guarantee the availability of patent protection for products and processes in all areas of technology, including biotechnological inventions, and plant and animal inventions.  It should include patent protection, without exception, for all new, useful and non-obvious inventions.

 

·         Protect confidential test data for a minimum of five years against use by third parties in expedited regulatory approval procedures.

 

·         Limit the use of compulsory licenses to cases of national emergency or to remedy fully adjudicated findings of misuse of the patent rights that cause harm to competition in a market.  The FTAA should ensure that the issuance of compulsory licenses does not undermine the normal exercise of patent rights.

 

·         Prohibit international exhaustion of intellectual property rights.  A regime of international exhaustion would be harmful to international trade and investment by undermining the incentives provided by IPR to invest in innovation and brand reputation.  Businesses have legitimate interests – relating to quality control, product safety, brand reputation and commercial strategy – in controlling the distribution of their goods across different markets.  The undesirable effects of international exhaustion include damage to brand reputation, consumer confusion, health risks stemming from improperly labeled products and the diversion of products to the markets capable of providing the highest prices.

 

·         Require countries that have not yet done so to ratify and implement the World Intellectual Property Organization (WIPO) Copyright Treaty and the WIPO Performances and Phonograms Treaty, striking a balance among the rights, interests and obligations of network operators, service providers, content providers and users in a manner consistent with the U.S. Digital Millennium Copyright Act.

 

·         Adopt and implement measures to reduce piracy and counterfeiting within each country and at its borders.

 

 

INVESTMENT

 

USCIB strongly supports a comprehensive chapter on investment in the FTAA.  Investment protections will be crucial for ensuring full regional economic integration and will protect the competitiveness of U.S. industry.  Foreign direct investment is crucial to the continued economic growth and stability in the Americas. Legal security, in form of strong international investment protections, is necessary to ensure continued economic integration and growth.  Investors will not undertake large-scale foreign investments if they do not have the confidence that host governments will be held accountable to a set of binding international protections.  Conversely, host governments will not be able to attract the foreign investments that are necessary to their economic growth without ensuring investors that their investments are secure and protected from arbitrary measures imposed by local governments.

 

 

Key elements for the investment chapter:

 

The investment chapter of the FTAA should contain the basic protections that are currently codified in bilateral investment treaties (BITs) that countries in the Hemisphere have signed.  The most important of these protections are as follows:

 

·         Transparency:  Government measures affecting foreign investors and investments should be transparent and administered in a reasonable, objective, and impartial manner.  Transparency can be encouraged by requiring a public comment period prior to the adoption of laws, regulations and administrative policies that affect foreign investors.  The private sector should be permitted to submit comments through written submissions and, when appropriate, public hearings.  The comment period should commence a reasonable time period prior to implementation of new rules in order to permit firms to resource adequately and become familiar with the rules.  To the extent practicable, regulations, laws and policies should be easily accessible, and should be made available through electronic means.  In addition, countries should adopt procedures to redress inconsistent or ineffective enforcement of rules between foreign and domestic investors.

 

·         Definition of Investment:  The investment chapter of the FTAA should cover all types of investment, including, but not limited to equity and portfolio investment,  tangible and intangible property, enterprises and interests in enterprises, contract and concession rights, intellectual property rights, equity, bonds, and loans.

 

·         Relative Standards of Treatment:  National treatment obligates governments to treat foreign investors and investments the same as it treats its own investments and investors in like situations.  The most favored nation requirement obligates governments to treat investors from other treaty signatories the same as it treats investors who are in like situations.  The FTAA should guarantee the better of MFN or national treatment with respect to both the establishment of investment and post-entry operations;

 

·         Free Movement of Capital:  The FTAA should guarantee investors the right to transfer funds related to an investment, including the right to repatriate profits, interest, proceeds from liquidation, and infusions of additional capital, in a freely convertible currency at a market rate of exchange.  We recognize, however, that certain countries in the region may face severe balance of payments difficulties and may not be able to meet this obligation in all cases.  Therefore, the FTAA should contain safeguards that give countries the necessary leeway to handle such problems.  An exception should also be made to provide for the enforcement of criminal laws.

 

·         Free Movement of Key Personnel:  The FTAA should guarantee the right to free movement of key personnel.  This includes the right to enter and temporarily stay  in the territory of an FTAA country for the purpose of establishing, developing administering or  providing other essential services to an investment.  In addition, investors should be given the right to hire top management personnel without regard to nationality.

 

·         Performance Requirements:  The FTAA should prohibit the imposition of performance requirements that require investors to:  (a) export a given level or percentage of goods and services; (b) achieve a given level or percentage of domestic content; (c) purchase or accord preference to domestically produced goods; (d) balance exports and imports; (e) restrict sales of goods or services within the host Party’s territory; and (f) transfer technology act as the exclusive supplier of goods or services to a particular region or world market.  The FTAA should also prohibit type (b), (c), (d), and (e) measures that are required as a condition for obtaining an advantage or benefit.

 

·         Expropriation:  The FTAA should prohibit expropriation except for a public purpose, in accordance with due process of law, and with payment of prompt, adequate and effective compensation in a G-7 currency or its equivalent in a convertible currency.  This prohibition should cover both direct and indirect expropriations to ensure that it applies not only to outright takings of property but also to regulatory takings and creeping expropriations.

 

·         General Treatment Standards:  All BITs contain a provision guaranteeing investors a certain minimum standard of treatment, which includes fair and equitable treatment, full protection and security, and treatment in accordance with international law.  These provisions fill gaps that may be left by the more specific investor protections and to impose on host governments a general duty of good faith, fair dealing, and due diligence to protect foreign investors and investments.  The guarantee of fair and equitable treatment ensures that investors are not treated arbitrarily, and includes, for example, of duty of honesty and fair dealing and a guarantee of due process of law.  The provision regarding full protection and security requires governments to act with due diligence in protecting the physical security of foreign investors.  The requirement to provide treatment in accordance with international law complements the other general treatment standards and incorporates customary international into the treaty.

 

·         Dispute Settlement:  All BITs contain a mechanism for investor-state and state-state dispute settlement.  This provision for investor-state dispute settlement allows foreign investors to initiate arbitration proceedings against host governments who have violated their obligations with respect to the protection of the investor’s investment.  If the arbitration tribunal renders an award in favor of the investor, the host government may be required to pay monetary compensation for the damage done to the investment.  Investor-state dispute settlement is critical for ensuring that governments meet their international obligation.  It enhances the discipline on governments to follow the rules and settle disputes in a non-politicized and timely manner.  It is essential to include this mechanism in the FTAA in order to ensure that governments meet their international obligations.

 

 

Telecommunications and Electronic Commerce

 

USCIB recommends that commitments on basic telecommunications, value-added services, computer-related services, and the other service sectors associated with the infrastructure needed for business-to-business and business-to-consumer electronic commerce are included in the final FTAA agreement.  Moreover, new barriers to electronic commerce should be avoided.

 

In response to specific language in the July 3, 2001 draft FTAA Chapter on Services, USCIB offers the following comments:

 

·         Page 7.11, section 7.2 (Market Access): USCIB is concerned that the obligation is overly vague and seeks clarification on the extent of the obligation and its enforceability.

 

·         Page 7.11, section 7.2 (Access and Use): USCIB believes the section should read as follows: “Each Party shall ensure that persons of another Party have access to and use of any public telecommunications transport network or services, including private leased circuits, offered in its territory or across its borders for the conduct of their business, on reasonable, transparent, and non-discriminatory terms and conditions.”  This slightly revised language ensures greater access to networks and transparency.

 

·         Page 7.21, section 1 (General Exceptions): USCIB believes that self-regulation is the best means of balancing the free flow of information and effective privacy protection.  Moreover, USCIB supports the principle of non-discrimination when governments adopt different approaches to privacy.  At a minimum, if such an exemption is included in an FTAA it should be consistent with GATS Article XIV (General Exceptions).  GATS qualifies the exception by ensuring that "such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination where like conditions prevail, or a disguised restriction on trade in services."  GATS Article XIV consistent language is found in the second variant of this section.

 

USCIB further requests that the U.S. government urge its FTAA partners to adopt a “top-down” negotiating approach (in other words, an approach in which parties make full market access and national treatment commitments with all sub-sectors assumed to be covered) across all services sectors, and in particular for basic telecommunications, value-added services and computer-related services, with limitations/reservations held to a minimum and explicitly noted on commitment schedules.

 

Attached are USCIB’s existing general views on trade related aspects of telecommunications and electronic commerce. 

 

We hope these comments prove helpful in future negotiations on the preliminary draft texts of the FTAA Agreement.

 

Sincerely,

Thomas M.T. Niles

 

Attachments:

·         USCIB comments regarding telecommunications and electronic commerce in the FTAA negotiations

·         USCIB letter to Robert B. Zoellick supporting the FTAA and outlining goals for the investment chapter

 

USCIB Comments Regarding Telecommunications

and Electronic Commerce in the FTAA Negotiations

 

 August 21, 2001

 

USCIB proposes that the following core principles be included:

 

Ø       Promote the development of the domestic and global infrastructure that is necessary to conduct e-commerce while avoiding barriers that would hinder such development;

 

Ø       Promote full implementation of existing commitments and seek increased liberalisation for  all basic telecommunications and value-added services;

 

Ø       Promote the development of trade in goods and services via e-commerce; and

 

Ø       Promote strong protection for intellectual property made available over digital networks.

 

 

(1.)   Promote the development of the domestic and global infrastructure that is necessary to conduct e-commerce, USCIB seeks:

 

·              full adoption by all FTAA Members of the Information Technology Agreement (ITA) and redoubled  efforts to conclude the ITA II agreement.  These agreements are important to ensure that all countries have access to the hardware and software necessary to deploy and access the e-commerce infrastructure; 

 

·              full market access and national treatment commitments by FTAA Members for the sectors that are associated with the infrastructure needed for business-to-business and business-to-consumer e-commerce; and

 

·              an open, competitive market for electronic commerce, including commitments   among FTAA Members not to   impose new barriers to the development of the e-commerce infrastructure.

 

 

(2.)   Promote full implementation of existing commitments and seek increased liberalization for all basic telecommunications and value-added services, USCIB at a minimum seeks:

 

·         broader market access and national treatment commitments;

 

·         earlier implementation dates;

 

·         reductions or elimination of foreign ownership restrictions;

 

·         adherence to the “Reference Paper” commitments for basic telecommunications services only; and

 

·         adherence to the GATS Annex on Telecommunications, and the similar provisions within the FTAA (Page 7.11, section 7.2) for access to and use of public telecommunications networks for the provision of value-added services, including Internet services, and other sectors for which FTAA Members have made commitments.

 

 

(3.)   Promote the development of trade in goods and services via e-commerce, USCIB seeks:

 

·         formal recognition by FTAA Members that the chapters on goods, services, investment and intellectual property apply to electronic commerce, consistent with USCIB’s views with the current commitments under the General Agreement on Tariffs and Trade (GATT), the General Agreement on Trade in Services (GATS) and the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).  This is essential given the fact that electronic commerce is not a new form of trade but rather a new medium for conducting trade in goods and services and delivery of intellectual property. under

 

·         agreement among FTAA Members that in  scheduling services commitments under the FTAA that the existing, classifications under existing international standards such as the GATS, should be flexible enough to accommodate technological progress in the delivery of services.  As technology evolves, the interpretation of the existing classifications of goods and services based on this technology should also evolve to capture these advances.  With such flexibility,  FTAA member countries can ensure that they benefit from the tremendous productivity increases and cost savings associated with the information technology revolution; [1]

 

·              assurances that electronically delivered products (i.e. goods or services) receive market access and national treatment benefits that are no less favorable than those currently available for such products delivered physically;

 

·              meaningful market opening commitments by FTAA Members for all services that can be delivered via e-commerce, whether on a cross-border or consumption-abroad basis; and

 

·              make permanent the practice of not imposing customs duties on electronic transmissions.

 

 

(4.)   Promote strong protection of intellectual property made available over digital networks, USCIB seeks:

 

·         Effective and timely implementation and enforcement of the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs) by FTAA Members.  With the rapid development of digital technologies and electronic services, the need for strong protection and enforcement of intellectual property rights is imperative.  The TRIPs Agreement plays a very important role insofar as it provides minimum standards for such protection and enforcement.

 

·         Timely ratification of the World Intellectual Property Organization (WIPO) Copyright Treaty and the WIPO Performances and Phonograms Treaty consistent with the approach in the United States balancing the rights and obligations of network operators, service providers, and content providers found in the Digital Millennium Copyright Act (DMCA).

 

[1] The flexibility referred to here is limited to existing GATS classification schemes and does not refer to the classification of a product delivered electronically as either a good or a service.

 

 

July 30, 2001

 

The Honorable Robert B. Zoellick

United States Trade Representative

600 17th Street, NW.

Washington, DC 20508-4801

 

Dear Ambassador Zoellick:

 

We strongly support the efforts of the U.S. Government, and the Office of the U.S. Trade Representative in particular, to move forward on the negotiations to create a Free Trade Area of the Americas and with bilateral agreements with Chile and Singapore.  We wish to emphasize to you the importance to the U.S. economy  and to the economies of our FTAA partners of foreign investment and the need to include strong investor and investment protections, including investor-state dispute settlement, in these agreements.  We would like to suggest certain changes to the dispute settlement process that would make the process more transparent and, we hope, less susceptible to the misunderstandings that have arisen.

 

Investment in FTAA Partners

 

Our Latin American partners have experienced a dramatic surge in foreign investment and have concluded a number of bilateral investment treaties in the past decade.  Countries in Latin America increasingly are looking to foreign investment to finance their growth and  are negotiating investment protection treaties at a rapid pace to help attract and secure that investment.  Unfortunately, the United States’ participation in this investment activity has been relatively dormant.

 

In 1994, one out of every twelve dollars of gross fixed capital formation in Latin American countries came from external sources.  By 1998, the figure doubled — with one out of every six dollars coming from external sources.  Looking at the growth of foreign investment in another way, annual flows of foreign investment to the region nearly tripled  between 1995 and 1999 – rising from $30 billion per year to $90 billion per year. 

 

U.S. involvement in the region has not kept pace.  According to the Bureau of Economic Analysis, U.S. investment flows to the region in 2000 were approximately $17.8 billion, virtually the same as in 1994.  At the same time, our competitors in the European Union have stepped up their new investments from $3 billion in 1995 to just under $25 billion in 1998.

 

The growth of investment treaties mirrors the growth in investment.  In the 1980s and into the early 1990s, foreign investment was viewed suspiciously by many governments in Latin America.  But by the mid-1990s, attitudes and policies started to change.  Governments began to open their markets to foreign investors and negotiated bilateral treaties as a signal to outside investors that foreign investment would be protected.  By the end of 1996, Latin American countries had signed approximately 300 bilateral investment treaties.  At year-end 1999, the number of treaties rose to 340.

 

 The United States, however, has signed investment agreements with only three of the top 10 Latin American recipient countries of foreign investment.  In contrast, countries in the European Union had signed more than 50 bilateral investment treaties with Latin American countries as of 1996 and have added another 75 since then.

 

Importance of Investment Provisions

 

An FTAA that opens borders to trade and provides strong investment protections would create enormous commercial opportunities for U.S. companies, their workers and their families.  In particular, trade liberalization combined with investment protections fosters greater synergies in production and distribution operations.  Foreign investment by U.S. companies complements their activities in the United States, promoting greater productivity, research and development, investment in physical capital, and new technology.  The payoff is in better, higher-paying jobs and a higher standard of living in the United States.  Restrictions on foreign investment, which prevent U.S. companies from expanding abroad, generally reduce activities in the United States and thus, lower the U.S. standard of living.

 

Strong investment protections not only encourage foreign investment and economic growth but also foster democratic principles and policies, including the rule of law, transparency of laws and procedures governing foreign investment, respect for private property and a market-based free enterprise system.

 

A strong FTAA chapter on investment protection and liberalization is also needed to rebalance the playing field which has shifted in favor of our competitors in the European Union because the EU and not the United States has been at the forefront of negotiating bilateral investment protections in the region.  We risk losing enormous opportunities for U.S. companies, their workers and their families in the Mercosur in particular, and the region as a whole, if we do not negotiate strong investment provisions in the FTAA.

 

Investment provisions in the FTAA — Investor-State Dispute Settlement

 

In particular, we believe it is essential that the FTAA include all of the fundamental protections found in our bilateral investment treaties (BITs) and in NAFTA Chapter 11.  The core protections in these agreements are intended to ensure that governments act fairly and do not discriminate against U.S. investors.   The United States has sought inclusion of these protections in bilateral and multilateral agreements since World War II.  This is not a trend peculiar to the United States.  There are some 1500 BITs in force around the world-- most of them have investor protection provisions and investor-to-state dispute procedures found in U.S. BITs and NAFTA Chapter 11.

 

Among the key protections is the so-called “investor-state” dispute settlement mechanism, which has been an integral part of our investment agreements since the first U.S. bilateral investment treaties were signed in the early 1980s.   This provision provides a procedure for investors to seek compensation when the government fails to provide fair and equitable treatment to foreign investors, discriminates against a U.S. investor, or expropriates property either directly or indirectly without paying prompt, adequate and effective compensation.

 

The provisions of our investment treaties provide substantially the same guarantees as provided under U.S. law, including the takings clause of the fifth amendment of the Constitution.  The primary difference is that the investor-state procedure goes through arbitration rather than the court system as in the United States.  This provision was created to provide U.S. investors substantially equivalent protections as they receive in the United States.  This is particularly important in countries without an independent judiciary or similar standards of investment protection.

 

Access to investor-state arbitration procedures is critical to provide effective, enforcement of investment provisions and to obtain appropriate redress in a timely manner.  Limiting investment dispute settlement to state-to-state procedures will unnecessarily politicize disputes, leaving investors, particularly small and medium-sized enterprises, with little recourse save what their government decides to do after weighing the diplomatic pros and cons of bringing a particular claim.

 

Contrary to recent criticisms, the investor-state provisions neither undermine nor interfere with environmental, health, and safety laws that are applied in an even-handed and non-discriminatory manner.  The obligation undertaken in the NAFTA and in BITs is only that each country will apply its laws in a fair and non-discriminatory manner and that any expropriation will be accompanied by compensation.  Even if such laws do not meet these standards, the NAFTA and BITs  do not require a government to change its law.  Rather foreign investors can only seek compensation for the unfairness, discrimination, or expropriation.

 

           Attached you will find a summary of recent NAFTA cases that have been subject to some criticism.  Contrary to critics of investment protections, where the cases proceeded to NAFTA panels, no panel has found against a government’s even-handed application of bona fide environmental protections.  Rather, the only NAFTA arbitration panel decisions that have upheld claims against governments purporting to act for environmental reasons found instead that these governments acted arbitrarily and in a discriminatory manner with respect to foreign investors. 

 

             Transparency   

 

We remain concerned, however, that arbitration panels that rule on NAFTA investment provisions are presently closed to the public, which has amplified misunderstandings about this process.  We strongly support U.S. government efforts to negotiate provisions in future free trade agreements that will open these proceedings to the public to the same extent as our court proceedings.  Furthermore, briefs submitted to panels and final panel reports should be made available to the public, provided that procedures are in place to protect sensitive and confidential business information.  Greater transparency will demonstrate that the process is fair and will help quell the concerns that have been generated by a basic misunderstanding about how the process works.

 

We hope you will find this information helpful as you move forward in the debate over trade and investment

 

Sincerely,

 

Thomas Niles

President

US Council for International Business

 

Jerry Jasinowski

President

National Association of Manufacturers

 

William Reinsch

President

National Foreign Trade Council

 

Calman Cohen

President

Emergency Committee for American Trade

 

Attachment: Summary of NAFTA Cases

 

Cc: Secretaries Powell, O’Neill, Evans and Administrator Whitman

 

 

SUMMARY OF RECENT NAFTA CASES: THE FACTS

 

 

Issue

 

A review of recent NAFTA investment cases demonstrates that that the investor-state dispute settlement procedures do not constrain governments from protecting the environment

 

 

ETHYL

 

A U.S. investor, Ethyl Corporation, is a manufacturer of a fuel additive, MMT (methylcyclopentadienyl manganese tricarbonyl).  MMT has more than its share of controversy.  The U.S. Environmental Protection Agency sought to prohibit its use in the United States under the Clean Air Act, but lost in court. 

 

As early as 1996, the Government of Canada passed legislation banning the importation of MMT, but not the manufacture of MMT in Canada.The ban also prohibited interprovincial trade in MMT.  In short, the act permitted the manufacture of MMT in Canada and its use as a gasoline additive, as long as MMT was not imported or shipped across provincial or national borders.  This ban severely limited Ethyl’s Canadian operations.

 

Ethyl was not the only entity affected by the statute.  The province of Alberta has refineries using MMT.  Joined by Quebec, Saskatchewan and Nova Scotia, Alberta initiated a dispute resolution process established under Canada’s Agreement on Internal Trade (AIT), an instrument governing the relationship between federal and provincial governments on the regulation of trade. 

 

The Canadian panel  issued its decision that the MMT Act was  invalid.  The panel found that “[i]t is clear  . … that it was the automobile manufacturers who were the driving force behind the elimination of MMT.  They claimed that the on-board monitoring equipment in new vehicles would be impaired by the use of MMT-enhanced gasoline.  The evidence as to the impact of MMT on the environment is, at best, inconclusive.” 

 

Faced with this result, the Canadian government decided to settle the dispute under the AIT with Alberta and to settle the NAFTA case with Ethyl.  The NAFTA panel never heard any evidence with respect to the environmental impact of MMT and never rendered a decision on the import ban on MMT.  The settlement of the NAFTA case was prompted by the ruling of a Canadian inter-provincial panel that found that the Canadian ban was arbitrary and illegal under Canadian law.

 

It is instructive to note however that in its press release, the Canadian government said its legislation was based on representations from Canadian automobile manufacturers that MMT adversely affected on-board equipment.  The press release stated:

 

“Current scientific information fails to demonstrate that MMT impairs the proper functioning of automotive on-board diagnostic systems”.

 

Despite the fact that the NAFTA panel did not hear evidence on the environmental aspects of MMT, the Canadian press release also stated that:  “ … there is no new scientific evidence to modify the conclusions drawn by Health Canada in 1994 that MMT poses no health risk”  (emphasis added)

 

Conclusion:  The NAFTA panel never decided the Ethyl case; Canada settled.  Consequently, there is no basis in the Ethyl case to conclude that NAFTA permits a corporation to overturn a treaty members’ laws to protect the environment.

 

METALCLAD

 

After receiving assurances from the Mexican federal government that it obtained all the necessary permits and complied with all legal requirements, Metalclad constructed a waste disposal facility in Mexico, which would have the capacity to reduce toxic waste in the region by 10 percent.  Several independent studies were conducted which demonstrated that the project would not harm the environment, and the Mexican Federal Attorney's Office for the Protection of the Environment concluded that the landfill site was geographically suitable for a hazardous waste landfill.  Metalclad even entered into a Convenio with the federal government that provided for and allowed the operation of the landfill.  The Convenio specified measures that Metalclad would be required to take in order to ensure that the project would not harm the environment.

 

Some four years after construction, a local government prevented the facility from opening by denying a municipal construction permit.  Metalclad was not given notice of, or an opportunity to participate in, the town council meeting in which the decision was taken to deny the permit.  Three days before leaving office, the Governor issued an Ecological Decree, which declared the site a Natural Area for the protection of a rare cactus.  To this day, the site remains inoperative and Mexicans dispose of toxic waste by dumping it in rivers and streams.

 

A NAFTA tribunal found the municipality's denial of the construction permit was politically motivated and outside the local government’s jurisdiction.  The tribunal also found that the arbitrary denial of the permit  constituted an expropriation of the Metalclad facility.  The tribunal also found that the Ecological Decree was expropriatory because it barred forever the operation of the landfill.  On this basis, the arbitration panel awarded Metalclad $16 million.

 

Mexico appealed the panel's decision in Canadian courts.  The court set aside the finding that the municipality's actions violated the obligation of fair and equitable treatment, but upheld the tribunal's finding that the Ecological Decree expropriated Metalclad's investment.  The court left the door open for further appeal on grounds of transparency, but Mexico subsequently chose to settle the case with Metalclad.

 

Conclusion:  The tribunal ruled against the Mexican government, not because it was protecting the environment, but because the municipality acted arbitrarily and attempted to shut down the facility for political reasons. To the extent that the tribunal found that the Ecological Decree was expropriatory, a U.S. court would likely have reached the same conclusion under the taking clause of the 5th Amendment of the U.S. Constitution.

 

 

S.D. MYERS

 

S.D. Myers Inc., a privately - held family company, was a leading provider of PCB (polychlorinated biphenyl) waste remediation in the United States, operating a U.S.  Environmental Protection Agency-approved facility in Ohio.  In 1989, Myers established a subsidiary in Canada to assist Canadian waste holders prepare their waste for export to Ohio.  In 1986, the United States and Canada had entered into a Transboundary Agreement, which recognized that the cross-border movement of hazardous wastes could result in the more efficient handling and disposal of such materials.

 

PCBs are chemical agents used primarily in electrical transformers.   When it was discovered that PCBs could cause negative health effects, the Canadian government in 1988, banned their use and required their  removal in accordance with environmental guidelines.

 

Myers offered Canadian customers rates, which were 25-50% of the cost quoted by its largest Canadian competitor, Chem-Security at Swan Hills in northern Alberta.

 

Canadian industry lobbied Canada's then federal environment minister, Sheila Copps, to block Myers’ Canadian operation.  In 1995, she issued an order prohibiting the export of PCB waste to the United States even though such exports were permitted under a transboundary Agreement and the U.S. border was open to receive the waste.  On several occasions, Minister Copps stated that the ban was put in place to help ensure that the destruction of PCBs materials was “done in Canada by Canadians.”   The ban destroyed the Myers Canadian operation and caused significant harm to Myers’ U.S. business.  The business that Myers conducted in Canada was shifted to its Canadian competitor.

 

The NAFTA tribunal found that the Canadian ban on export of PCBs was discriminatory and that it violated the minimum standard of treatment required by NAFTA.  The tribunal has yet to rule on the level of damages.

 

Conclusion:  The S.D. Myers tribunal did not find that bona fide environmental measures were inconsistent with the provisions of NAFTA Chapter 11.  Instead, the tribunal found that the Canadian measures were protectionist in intent and did not serve legitimate environmental objectives in a fair and even-handed manner. 

 

METHANEX

 

A Canadian investor (Methanex) produces and distributes methanol to producers of methyhl-butyl ether (MTBE) a gasoline additive.  California banned the use of MTBE on the grounds that it is harmful to California’s water supply.  Methanex claims that the measure is based on flawed science, and that less restrictive alternatives are available other than banning its use.

 

Methanex alleges that the measure is expropriatory, discriminatory, and violates the minimum standard of treatment required by NAFTA.  The case is still pending before a NAFTA arbitration panel.  Until a ruling is issued, no conclusions can be reached about the interaction between Chapter 11 and environmental laws and regulations.

 

 

 



 





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