Remarks of Stephen Canner
Vice President for Investment Policy
US Council for International Business
Georgetown University Law Center
January 30, 2004
Investment Arbitration under NAFTA and BITs
Thank you for inviting me to speak with you today on investment arbitration under NAFTA and Bilateral Investment Treaties.
By way of background, I am the Vice President for Investment Policy and Financial Services at the United States Council for International Business, a trade association with membership of some 250 global companies, augmented by members from the legal community and business associations.
Among the various trade associations, USCIB’s comparative advantage is our affiliation with the OECD’s Business and Industry Advisory Committee (BIAC) and the International Chamber of Commerce (ICC). We are the voice of U.S. business to each of these organizations. In addition, we are the U.S. business representatives to the tripartite International Labor Organization (ILO).
The issues of investment arbitration under NAFTA and our bilateral investment treaties (BITs) are important and timely.
They are important because international investment is a large and growing component of US international commerce.
From 1994 to 2004, direct investment outflows from the U.S. increased from $73 billion to $119 billion.
In the same period, US owned non-financial foreign assets grew from $ 0.6 trillion, to $1.5 trillion.
US investment abroad gives a presence for our firms to enable them to compete in foreign markets-- a must in today’s global economy.
Our foreign investment benefits recipient countries, in the form of increased capital, employment, technology and management skills.
Our foreign investment also benefits the US. There is an inextricable relationship between trade and investment. They complement each other. This is seen in our export performance. Exports from US owned firms to their foreign affiliates are nearly one quarter of our total exports.
The issue is timely, because
The U.S. is engaged in bilateral and regional negotiations, where the issue is being addressed in FTAs or BIT negotiations—and some countries are resisting the inclusion of investment provisions altogether, or balking at the inclusion of investor to state provisions.
In some instances, the US government, in these negotiations, has retreated from the high standards of investor protection that they insisted upon just 2-3 years ago.
Further, recent NAFTA decisions have raised the voices emanating from the NGO community that somehow investor to state inhibits the right of governments to regulate, and that NAFTA tribunals made bad decisions—(Strongly disagree!)
(They sought to amend the I/S provisions during the debate on Trade Policy authorizing legislation, but did not succeed.) Many of these organizations are calling for the deletion of I/S from our FTAs and BITs
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With this background, let me move to the specific provisions and how those provisions benefit US firms.
A Bilateral Investment Treaty, and/or an investment chapter of a free trade agreement contains binding obligations to protect foreign investors. There are five core rights: National treatment, most favored nation treatment, fair and equitable treatment, transfers, and protection against direct and indirect expropriation.
1. National Treatment—requires that each state accords to investors of another state (and their investments) treatment no less favorable than it accords in like circumstances, to its own investors. This applies to entry into the market, and post entry operations.
In other words, if a domestic firm in country X can enter the market to produce widgets, than an U.S. firm, in “like circumstances” should be able to enter the market. And if a domestic firm can produce and distribute those widgets without being saddled by discriminatory regulations imposed by a host government, then the U.S. competitor should be able to produce and distribute on the same terms.
National Treatment creates a level playing field between U.S. firms operating abroad and domestic firms in the host country.
2. Most favored Nation treatment holds that each state shall accord to investors of another state
(and their investments) treatment no less favorable than it accords, in like circumstances, to investors (and their investments) of any other state.
Simple Translation: U.S. firms get as good a deal as any other foreign firms. This creates a level playing field for U.S. firms vis-à-vis it other foreign competitors in the host country.
3. Fair and Equitable Treatment of covered investments– business sees this as a minimum
standard of treatment, which in no case, should be less favorable than that required by international law.
4. Free transfers of profits and capital—in a freely useable currency. If you bring your money in,
you should be able to bring your money out… it is as simple as that, and
5. Protection against direct or indirect expropriation of property---if you take property, you pay.
In all, or virtually all bilateral investment agreements, these obligations are backed by a dispute settlement system that enables an investor to bring claims against a host government to an arbitration panel where awards only of money damages may ensue. In short parlance, the provision is called “investor to state”.
The investor does not require the permission of the host government to initiate a claim, and the host government cannot opt out of the process. In this way, investor to state offers a depoliticized forum in which to settle disputes.
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These provisions and investor to state are found in all of the more than 40 U.S. bilateral investment treaties, and in investment chapters of Free Trade Agreements. They are also common to the 2,200 Bilateral Investment Treaties that exist between other developed and developing countries.
They promote stability, predictability and the rule of law. They deserve your support, and the support of your clients.
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Why? Because the world is a risky place to do business. Hardly a day passes without reminders that investing in today's world—be it Russia, Latin America, or elsewhere-- can be very risky.
US energy companies are compelled to invest billions of dollars in extremely risky places to meet our increasing energy needs.
US manufacturers are compelled to have a presence in overseas markets to serve those markets and their global needs.
In these circumstances, we believe that the U.S. should be raising the bar of the standards of protection in BITs and in investment chapters. Unfortunately several of the provisions I have referred to we find the USG lowering the standards of protection.
For example:
*In the wake of some controversial cases, NAFTA Ministers issued in July of 2001 an “interpretation” of the “fair and equitable treatment” standard, I cited earlier. The effect of this interpretation, we believe, is to flip flop the standard from a minimum standard to a maximum standard or a “ceiling”. And, building on this “interpretation”, this flip- flopped version has now become the new standard in US BITs and investment chapters of FTAs---see Chile, chapter 10- article 10.4
So, in present and future BITs, rather than having a minimum standard of treatment, we now have a ceiling.
This is wrong! Further, our competitors have not adopted this flip flopped version and as a result, U.S. investors must shoulder greater risks in overseas markets.
*In expropriation, the U.S. has added language in Chile, Singapore and expectedly in future agreements whereby.
*Essential security
