BODY: May 8, 2001 Statement of
Daniel M. Price, Partner, Powell, Goldstein, Frazer & Murphy LLP, Before the
Subcommittee on Trade of the House Committee on Ways and Means Thank you for
inviting me here today to present the views of the United States Council for
International Business on the importance of including investment protections in
the agreement establishing the Free Trade Area of the Americas (FTAA). Trade and
investment are interdependent. To achieve the benefits of economic
liberalization, investment barriers must be addressed as comprehensively as
trade barriers. And the rules protecting U. S. investment abroad must be both
rigorous and enforceable. Taken together, the expansion of trade and investment
flows has spurred economic growth, created jobs for millions of people in the
United States and abroad, raised global living standards, and has helped forge
bonds of mutual interest and economic opportunity among countries around the
world. International investment flows are rapidly becoming as important as trade
in goods and services. The world economy is no longer characterized by companies
that remain parked within national borders and that simply export or sell
locally. Companies are investing abroad in ever-increasing numbers. They do so
to get closer to their markets, acquire new technologies, form strategic
alliances and enhance competitiveness by integrating production and
distribution. The activities of their affiliates are impressive and make an
enormous contribution to economic welfare worldwide. According to the United
Nations World Investment Report 2000, sales by foreign affiliates of
corporations totaled $14 trillion in 1999, over four times the figure for 1980
and twice the value of global exports. Foreign affiliates accounted for over $3
trillion in exports in 1999. The production of foreign affiliates now accounts
for approximately 10% of global GDP, and foreign affiliates now employ over 40
million people. II. Responding to Criticisms of Investment Protection and
Liberalization In spite of the economic significance of investment flows, some
critics have suggested that promoting stable investment regimes abroad will lead
to an export of American jobs. Some have also argued that investment
liberalization will lead to a "race to the bottom" with investment flowing
principally to countries with minimal or no protections for the environment or
worker rights. The facts do not support these claims. A. International
Investment Flows - Inbound and Outbound - Contribute to the Economic Prosperity
of the United States The United States has been, perhaps, the greatest
beneficiary of the explosion in international investment over the past decade.
The United States receives more than 30% of worldwide investment. According to
the U. S. Bureau of Economic Analysis (BEA), foreign investment in the United
States grew seven-fold between 1994 and 2000, reaching almost $317 billion last
year. As of 1998, foreign companies had invested over $3.5 trillion in the
United States. They employed 5.6 million people and paid average annual salaries
of over $46,000, well above the average salary for U. S. workers as a whole. U.
S. subsidiaries of non-U. S. companies accounted for 13.5% of all U. S.
manufacturing jobs. In 1998, foreign companies' affiliates in the United States
accounted for approximately 22% of total U. S. exports. Inbound investment is
critical to the health of the U. S. economy. Outbound investment is equally
important. According to the BEA, between 1994 and 2000, U.S. outbound investment
doubled from $73 billion to $148 billion. As of 1998, the assets of non-bank
foreign affiliates of U. S. companies exceeded $4 trillion. In 1998, non-bank
foreign affiliates of U. S. companies had over $2.4 trillion in sales - that is
nearly two and one-half times the amount of U. S. exports of goods and services.
According to the Survey of Current Business, exports by U. S. multinationals
were $438 billion in 1998, an amount equal to some two-thirds of all U. S.
exports. Approximately 50% of these exports were to the majority-owned
affiliates of those U. S. companies. Thus, agreements promoting stable
investment regimes abroad do not export jobs, but rather lead to increased
exports of goods and services and contribute broadly to the economic well-being
of the United States. B. Investment Liberalization does not Lead to a Race to
the Bottom If lax environmental standards, low wages and the absence of worker
rights were the principal determinants of investment flows, one would expect the
least developed countries to be the host of the vast majority of foreign
investment. Yet the reverse is true. More than 75% of all foreign direct
investment is in the developed world. As noted, the United States itself is host
to more than 30% of all such investment. The United Kingdom runs a distant
second with a little more than one-fourth the total of the United States or $82
billion as of 1999. China, by contrast, received $40 billion in 1999, less than
5% of global flows. Thus, investment has, in fact, raced to the top, flowing in
overwhelming proportion to stable democracies that are characterized by high
living standards, well-developed regulatory regimes and transparent legal
systems. The wage statistics are equally telling. In 1998, the average
compensation paid to workers at majority-owned U. S. affiliates throughout the
world was $33,100. In Canada and Europe, which receive two-thirds of all U. S.
outbound investment, the average compensation at U.S. majority-owned affiliates
was $41,200. Investment has not "raced" to the lowest wage levels. The critics
confuse the cause and the cure: problems of environmental protection and labor
standards are preeminently problems of economic development. Inadequate
environmental standards and worker rights do not attract, and are not the result
of, increased investment flows; rather they are in part the consequences of the
absence of investment capital necessary to alleviate poverty and raise living
standards - the root cause of the problem. III. The Importance of an Investment
Chapter in the FTAA Our Latin American and Caribbean partners in the FTAA have
experienced a dramatic surge in foreign investment over the past decade. The
enormous opportunities that have opened up in the region - in large part as a
result of massive privatization efforts - have made Latin American and Caribbean
countries a primary destination for foreign investment among the developing
countries of the world. The region now accounts for approximately 10% of global
FDI inflows. According to the United Nations, FDI in the top 10 recipient
countries in the region grew almost 23% between 1998 and 1999 alone, and as of
1999 stood at $27 billion in 1999. While the U.S. is the largest investor in the
region, it has not kept pace with growth of investment opportunities there.
According to the BEA, U.S. companies invested $17.71 billion in Latin America
and the Caribbean in 1994. U.S. investment in the region in 2000 was virtually
the same, at approximately $17.8 billion. The United States is clearly not
taking advantage of the investment boom in the region. In fact, most of the
investment flows are between countries within the region, as they have already
begun the process of economic integration without us. In addition, our major
competitors, particularly from Europe, have stepped in to fill the vacuum. An
FTAA that both opens borders to trade and provides strong investment protections
would create enormous commercial opportunities for U.S. industry and would
unleash synergies in production and distribution operations. Trade
liberalization without investment liberalization will prevent companies from
achieving these synergies and rationalizing their supplier networks. Conversely,
investment liberalization without trade liberalization will lead to the creation
of duplicative production operations as producers are forced to build
manufacturing facilities behind the "tariff walls" protecting each market.
Investment protection and liberalization is thus a crucial part of a free trade
agreement. In addition to these economic benefits, an investment chapter would
promote broader U.S. policy goals. Investment agreements negotiated by the
United States essentially incorporate U.S. constitutional protections against
the taking of property without just compensation and against arbitrary or
discriminatory government actions. As they have done in the United States, these
principles foster development of the rule of law, respect for private property
and a market-based free enterprise system that are essential hallmarks of a
democratic society. Recognizing these important dynamics, some thirty leading
U.S. companies and trade associations wrote to Ambassador Zoellick on April 19
affirming their support for inclusion of an investment chapter in the FTAA
modeled on the strong and comprehensive provisions found in NAFTA (letter
attached). IV. The Need for Strong Legal Protection of Foreign Investment: Core
Elements of an Investment Chapter The explosive growth in cross-border
investment is attributable to several factors, not the least of which is the
development of strong, stable legal regimes to protect property rights. Over the
past decade, we have witnessed a sea change in the way countries - particularly
developing countries - have treated foreign investment. Whereas before they
pursued economic growth through state control of the private sector and import
substitution policies, they have come to realize that growth is best promoted
through free trade and liberal investment regimes. Countries in Latin America in
particular have undertaken vast privatization efforts and have revamped their
legal systems to attract foreign investment. According to the United Nations, of
1,035 changes worldwide in laws governing foreign direct investment between 1991
and 1999, 94% were more favorable to foreign investment. The number of bilateral
investment treaties (BITs) has risen from 181 at the end of 1980 to 1,856 at the
end of 1999. Countries in Latin America and the Caribbean have signed
approximately 300 BITs, virtually all of which were negotiated in the 1980s and
1990s. As of December 31, 1996, the countries of Latin America and the Caribbean
had negotiated 37 BITs among themselves, all in the 1990s. It is no coincidence
that these changes to the legal landscape have occurred at the same time as
cross-border investment has expanded over the past decade. It should be noted,
however, that the United States has signed investment agreements with only three
of the top 10 Latin American recipient countries of foreign investment. The FTAA
would include six of the remaining seven markets. Including an investment
chapter in the FTAA would help lock in these advances in creating a regulatory
environment hospitable to international investment. While strong investment laws
are not themselves sufficient to attract foreign investment, they are a
necessary prerequisite for such investment. A recent study by economists at the
Inter-American Development Bank found that strong investment laws, particularly
laws protecting foreign investors from expropriation and preserving contract
rights, play central roles in attracting FDI. It also found that free trade
agreements significantly increase investment among the members of the free trade
area. In order to establish a strong investment regime throughout the
Hemisphere, the FTAA should include all of the fundamental protections that have
been codified in United States bilateral investment treaties and in Chapter 11 of the NAFTA. The United States has sought the
inclusion of these principal protections in bilateral and multilateral
investment agreements since World War II when it began negotiating a series of
modern treaties of friendship, commerce and navigation (FCN). The investor-state
dispute settlement mechanism was included in the first U.S. bilateral investment
treaty (on which all subsequent U.S. BITs have been based) in 1980. What are
these fundamental protections? First, the investment chapter should guarantee
foreign investors the better of national treatment or MFN treatment, both with
respect to the establishment of investments and treatment thereafter. This will
ensure nondiscriminatory treatment and the removal of barriers to entry. Second,
the FTAA should protect investors against expropriation without payment of
compensation. This protection should extend both to direct expropriation - for
example, the physical taking or nationalization of property - and to indirect
expropriation such as may occur through regulation or other forms of so-called
creeping expropriation. The inclusion of indirect expropriation is crucial.
Government action may impair or destroy the value of an investment even if there
is no physical seizure or destruction of the property. Third, the investment
chapter should guarantee investment fair and equitable treatment, full
protection and security, and protection in accordance with international law.
These provisions have long been included by the United States in bilateral and
multilateral investment instruments. The fair and equitable treatment standard,
in particular, protects against lawless, arbitrary, unreasonable, bad faith or
other unjustifiable government actions. These protections help promote the rule
of law and are meant to safeguard the interests of U.S. investors where
government action or inaction, while not rising to the level of expropriation
per se or outright discrimination on nationality grounds, nonetheless subjects
the investor to adverse and injurious treatment. Fourth, the investment chapter
should guarantee the free movement of capital associated with the investment,
including the repatriation of profits. Without this protection, investors will
not commit the resources necessary to undertake large-scale investments. Fifth,
the investment chapter should prohibit performance requirements such as local
content and export requirements, and other trade-related investment measures.
Such measures distort trade flows and create economic inefficiencies, thereby
offsetting the benefits of the agreement. Finally, the investment chapter should
include a mechanism to allow investors to arbitrate investment disputes with
host governments and obtain monetary compensation for damages resulting from
violations of the agreement. Access to an arbitration procedure of this sort is
the only effective way to guarantee enforcement and obtain appropriate redress.
Limiting investment dispute settlement to a state-to-state procedure will
politicize disputes, leaving investors, particularly small- and medium-sized
enterprises, with little recourse save what their government cares to give them
after weighing the diplomatic pros and cons of bringing any particular claim.
Furthermore, a state- to-state dispute settlement procedure based on the WTO
model, which provides only prospective relief, will not remedy most violations
of the agreement. If, for example, a government expropriates an investor's
property, prospective relief without providing compensation to the investor will
not redress the injury done to the investor. V. Responding to Criticism of
NAFTA's Investor-State Dispute Settlement Mechanism The investor-state
dispute settlement mechanism has been perhaps the most controversial aspect of
the investment chapter of the NAFTA. Critics have alleged that it
undermines a nation's sovereign right to regulate. The evidence simply does not
support these claims. At the outset, two facts should be recognized. First,
under NAFTA an investor-state arbitral tribunal can only award the
payment of compensatory money damages to an injured investor; tribunals have no
authority to order a party to change its laws. Second, it is U.S. investors that
have more capital at risk than investors from any other country, and thus have
the most to gain from an effective mechanism for enforcing investor protections.
In any case, there is no evidence that arbitration tribunals will jeopardize
public welfare to uphold the economic interests of foreign investors. A careful
examination of the NAFTA arbitration decisions to date reveals that the
tribunals have acted with great care. In two cases where an arbitration tribunal
ruled in favor of a U. S. foreign investor -- SD Myers and Metalclad - the
tribunal found that the government authorities were acting arbitrarily or
targeting a specific foreign investor with unfair or discriminatory measures. It
should be noted that Mexico brought suit in a Canadian court to set aside the
Metalclad award, and the court recently upheld the tribunal's decision that the
U. S. investor's property had been expropriated. In two other cases - Azinian
and Waste Management - the U. S. investor lost outright, one on the merits, the
other on jurisdiction. In the recently released decision in Pope & Talbot,
the tribunal rejected all but one of the U.S. investor's claims. The one claim
that was upheld was based on a finding that the Canadian authorities had acted
unfairly in imposing extremely burdensome, and arguably illegal, administrative
requirements on the investor. While the tribunal was careful to avoid
questioning the motives of the Canadian Government in that case, it appeared
from the facts that the Government's actions were motivated by a desire to
punish the investor for bringing the NAFTA claim. In Ethyl - which is
often cited by critics as an example of a case where a foreign investor forced a
government to withdraw a bona fide environmental measure - Canada settled a
NAFTA case brought by a U.S. investor. However, the settlement was
spurred by a holding by a Canadian panel, not the NAFTA arbitration
tribunal, that the particular measures imposed by Canada violated an internal
Canadian arrangement called the Agreement on Internal Trade. This track record
hardly demonstrates that arbitration tribunals have overstepped their bounds in
protecting the rights of investors. To the contrary, the evidence to date shows
that tribunals have taken a reasonable, balanced and judicious approach in
interpreting and applying the NAFTA investment provisions. Nevertheless,
critics of the NAFTA investment chapter point to cases against the United
States that have not yet been decided - such as the Methanex or Loewen cases -
and have speculated about how tribunals in those cases might rule. Indeed, those
critics find troubling the very initiation of these claims. I do not express a
view on the merits of these pending cases. However, the mere fact that cases
have been brought against the United States in no way undermines the legitimacy
or integrity of the dispute settlement process. Indeed even frivolous cases may
be brought before a NAFTA panel just as they are brought in United States
courts every day, but this does not mean that either the court system or the
arbitration mechanism is flawed. If claims are found to be frivolous, then they
will be rejected. If claims are justified, then the respondent, including the
United States as the case may be, should pay compensation. This is the price of
living in an international system governed by the rule of law. The United States
has long been the champion of international investment rules. It has fought hard
for recognition of the international rule of law and for respect for
international dispute resolution bodies. The United States has enjoyed enormous
benefits from invoking dispute settlement provisions to break down trade
barriers or redress injuries to investors. Indeed, of the approximately 30
claims under BITs that have come before the International Centre for Settlement
of Investment Disputes ("ICSID"), about one-third have been brought by U.S.
investors. And of the 16 claims that have been brought under NAFTA's
investment provisions, 11 have been brought by U.S. investors. It would be
ironic if the United States, long the advocate for subjecting sovereign actions
to scrutiny under international law, were now to retreat from the very
international principles it worked so hard to enshrine. Concerns about
investor-state arbitration - and agitation over its compatibility with
sovereignty - are without foundation. Fears about overreaching arbitral panels
are likewise unfounded given the record of decisions. None of this should be
taken to imply that the system could not be improved. The process would benefit
from two important changes. First, the FTAA parties should consider increasing
the transparency of the process by ensuring that the briefs and arbitration
proceedings are open to public view, subject to reasonable protections for
confidential business information. An amicus, or "friend of the court,"
procedure might also be developed whereby interested members of the public could
express their views on the issues before the tribunals. Second, the parties to
the FTAA might consider the desirability of creating an appellate body that
would review arbitral awards for errors of law. Such an appellate mechanism
would accomplish three salutary goals: (1) it would address the risk of an
aberrant or wildly erroneous decision that seems to have captured the
imagination of critics; (2) it would contribute to the development of a coherent
body of jurisprudence on the interpretation of the FTAA; and (3) it would
eliminate the possibility of having the court systems in each of the 34 FTAA
parties become involved in the review of FTAA awards and hence the
interpretation of FTAA, a possibility left open by NAFTA. The Hemisphere
stands at the threshold of comprehensive free trade agreement talks in which
investment rules should figure prominently. Investor-state dispute settlement
will be essential to ensuring the effectiveness of those rules. Now is not the
time to depart from longstanding United States investment policy and time-tested
methods for the resolution of investment disputes. As the largest economy in the
region, the United States has the most at stake in hemispheric integration. By
leading the negotiation of an agreement that removes trade and investment
barriers and promotes democratic values, the United States can secure for itself
and its neighbors the benefits of economic growth and prosperity. An investment
chapter is an essential component of any agreement seeking to achieve these
goals.
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