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53–473 2010

INVESTMENT PROTECTIONS IN 

U.S. TRADE AND INVESTMENT AGREEMENTS 

HEARING 

BEFORE THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

MAY 14, 2009 

Serial 111–20 

Printed for the use of the Committee on Ways and Means 

( 


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COMMITTEE ON WAYS AND MEANS 

CHARLES B. RANGEL, New York, Chairman 

FORTNEY PETE STARK, California 

SANDER M. LEVIN, Michigan 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

JOHN S. TANNER, Tennessee 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

EARL BLUMENAUER, Oregon 

RON KIND, Wisconsin 

BILL PASCRELL, JR., New Jersey 

SHELLEY BERKLEY, Nevada 

JOSEPH CROWLEY, New York 

CHRIS VAN HOLLEN, Maryland 

KENDRICK B. MEEK, Florida 

ALLYSON Y. SCHWARTZ, Pennsylvania 

ARTUR DAVIS, Alabama 

DANNY K. DAVIS, Illinois 

BOB ETHERIDGE, North Carolina 

LINDA T. SA ́ NCHEZ, California 

BRIAN HIGGINS, New York 

JOHN A. YARMUTH, Kentucky 

DAVE CAMP, Michigan 

WALLY HERGER, California 

SAM JOHNSON, Texas 

KEVIN BRADY, Texas 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

JOHN LINDER, Georgia 

DEVIN NUNES, California 

PATRICK J. TIBERI, Ohio 

GINNY BROWN-WAITE, Florida 

GEOFF DAVIS, Kentucky 

DAVID G. REICHERT, Washington 

CHARLES W. BOUSTANY, JR., Louisiana 

DEAN HELLER, Nevada 

PETER J. ROSKAM, Illinois 

JANICE MAYS, Chief Counsel and Staff Director 

JON TRAUB, Minority Staff Director 

SUBCOMMITTEE ON TRADE 

SANDER M. LEVIN, Michigan, Chairman 

JOHN S. TANNER, Tennessee 

CHRIS VAN HOLLEN, Maryland 

JIM MCDERMOTT, Washington 

RICHARD E. NEAL, Massachusetts 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

BOB ETHERIDGE, North Carolina 

LINDA T. SA ́ NCHEZ, California 

KEVIN BRADY, Texas, Ranking Member 

GEOFF DAVIS, Kentucky 

DAVID G. REICHERT, Washington 

WALLY HERGER, California 

DEVIN NUNES, California 

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records 

of the Committee on Ways and Means are also published in electronic form. The printed 

hearing record remains the official version. Because electronic submissions are used to 

prepare both printed and electronic versions of the hearing record, the process of converting 

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process 

is further refined. 


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C O N T E N T S 

Page 

The advisory of May 07, 2009 announcing the hearing ....................................... 2 

WITNESSES 

Thea M. Lee, Policy Director and Chief International Economist, AFL–CIO .... 7 

Ambassador Alan P. Larson, Senior International Policy Advisor, Covington 

& Burling LLP ...................................................................................................... 13 

Theodore R. Posner, Partner, International Trade Group, Crowell & Moring ... 22 

Robert K. Stumberg Professor of Law and Director of Harrison Institute 

for Public Law, Georgetown University Law Center ........................................ 34 

Linda Menghetti, Vice President, Emergency Committee for American Trade . 46 

SUBMISSIONS FOR THE RECORD 

Chevron Corporation, Statement ............................................................................ 84 

Coalition of Service Industries, Statement ............................................................ 86 

Kevin P. Gallagher, Statement ............................................................................... 89 

Linda Menghetti, Statement ................................................................................... 93 

Mark Hudson Botsford, Statement ........................................................................ 101 

Sarah Anderson, Statement .................................................................................... 101 

Todd Tucker, Statement .......................................................................................... 105 

U.S. Chamber of Commerce, Statement ................................................................ 116 


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INVESTMENT PROTECTIONS IN 

U.S. TRADE AND INVESTMENT AGREEMENTS 

THURSDAY, MAY 14, 2009 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

SUBCOMMITTEE ON TRADE, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 10:03 a.m., in 

room 1100, Longworth House Office Building, the Honorable Sander M. Levin [Chairman of the Subcommittee] presiding. 

[The advisory of the hearing follows:] 


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ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON TRADE 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–6649 

May 07, 2009 

TR–2 

Trade Subcommittee Chairman Levin 

Announces a Hearing on Investment Protections 

in U.S. Trade and Investment Agreements 

Ways and Means Trade Subcommittee Chairman Sander M. Levin today announced the Trade Subcommittee will hold a hearing on investment obligations in 

U.S. bilateral investment treaties (BITs) and free trade agreements (FTAs). The 

hearing will take place on Thursday, May 14, in the main Committee hearing room, 1100 Longworth House Office Building, beginning at 10:00 a.m. 

In view of the limited time available to hear witnesses, oral testimony at this 

hearing will be from the invited witness only. However, any individual or organization not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed record of the hearing. 

FOCUS OF THE HEARING: 

The Obama Administration recently announced in the President’s Trade Policy 

Agenda that it would ‘‘review the implementation of our FTAs and BITs to ensure 

that they advance the public interest.’’ This hearing will focus on the investment 

protections that are included in U.S. FTAs and BITs. Those provisions have helped 

to safeguard investments held by U.S. citizens in dozens of foreign countries and 

protect U.S. investors from expropriation without compensation, as well as discriminatory and inequitable treatment by foreign governments. 

At the same time, concerns have been expressed regarding these investment provisions. These concerns include: whether our FTAs and BITs give foreign investors 

in the United States greater rights than U.S. investors have under U.S. law; whether the FTAs and BITs give governments the ‘‘regulatory and policy space’’ needed 

to protect the environment and the public welfare; and whether an investor should 

have the right to submit to arbitration a claim that a host government has breached 

its investment obligations under an FTA or a BIT. 

BACKGROUND: 

The United States is the largest foreign direct investor in the world, and also is 

the largest recipient of foreign direct investment. New U.S. direct investment in 

other countries was $333 billion in 2007 and $318 billion in 2008. New foreign direct 

investment in the United States was $238 billion in 2007 and $325 billion in 2008. 

The United States established its BIT program in 1981, largely modeled on European BITs with developing countries that had been in place since the late 1950s. 

Since then, the United States has established BITs with 47 countries, and has included investment chapters (similar to the provisions in BITs) in its free trade 

agreements. Among other things, FTA investment chapters and BITs provide for: 

‘‘national treatment’’ of investors from the countries that are party to the FTA or 

BIT; limits on the expropriation of investments and provisions for the payment of 

compensation when expropriation takes place; a ‘‘minimum standard of treatment’’ 


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for investors; and the right for an investor to submit an alleged breach of the investment provisions of the agreement to international arbitration. 

Those investment obligations, particularly in the investment chapter of the North 

American Free Trade Agreement (NAFTA), have raised concerns in recent years, in 

particular following a series of controversial disputes in investor-State arbitrations 

at the end of the 1990s and the beginning of the current decade. (Many of those 

cases did not involve the United States as a party, and, to date, the United States 

has not lost an investor-State arbitration under NAFTA or any other FTA or BIT.) 

Responding to concerns that investment protections may have been written too 

broadly, and that foreign investors in the United States may receive more favorable 

treatment for their NAFTA investor-State claims than U.S. investors would under 

U.S. law, Congress in the Trade Act of 2002 mandated several negotiating objectives 

to narrow the scope of investment protection. For example, the Act stated that the 

principal U.S. negotiating objective on foreign investment is to reduce or eliminate 

barriers to investment, ‘‘while ensuring that foreign investors in the United States 

are not accorded greater substantive rights with respect to investment protections 

than United States investors in the United States[.]’’ The parties to NAFTA also 

adopted a formal interpretation of the ‘‘minimum standard of treatment’’ provision 

at this time, to avoid a more expansive reading of that provision by arbitrators. 

Incorporating congressional objectives, the 2004 model BIT contains several 

changes to past BITs, including narrowing the definition of investment covered 

under the agreement, clarifying the meaning of the obligation to provide investors 

with a ‘‘minimum standard of treatment,’’ elaborating on the procedures for investor-State dispute settlement, and adding articles relating to the relationship between the investment obligations and labor and environmental standards. 

More recently, in 2007, U.S. FTAs with Colombia, Panama, Peru, and South 

Korea were amended to clarify that ‘‘foreign investors are not hereby accorded greater substantive rights with respect to investment protections than domestic investors 

under domestic law where, as in the United States, protections of investor rights 

under domestic law equal or exceed those set forth in this Agreement.’’ 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit for the hearing record must follow the appropriate link on the hearing page of the Committee 

website and complete the informational forms. From the Committee homepage, 

http://waysandmeans.house.gov, select ‘‘Committee Hearings.’’ Select the hearing for 

which you would like to submit, and click on the link entitled, ‘‘Click here to provide 

a submission for the record.’’ Once you have followed the online instructions, complete all informational forms and click ‘‘submit’’ on the final page. ATTACH your 

submission as a Word or WordPerfect document, in compliance with the formatting 

requirements listed below, by close of business May 28, 2009. Finally, please note 

that due to the change in House mail policy, the U.S. Capitol Police will refuse 

sealed-package deliveries to all House Office Buildings. For questions, or if you encounter technical problems, please call (202) 225–1721. 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing record. As 

always, submissions will be included in the record according to the discretion of the Committee. 

The Committee will not alter the content of your submission, but we reserve the right to format 

it according to our guidelines. Any submission provided to the Committee by a witness, any supplementary materials submitted for the printed record, and any written comments in response 

to a request for written comments must conform to the guidelines listed below. Any submission 

or supplementary item not in compliance with these guidelines will not be printed, but will be 

maintained in the Committee files for review and use by the Committee. 

1. All submissions and supplementary materials must be provided in Word or WordPerfect 

format and MUST NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised that the Committee relies on electronic submissions for printing the official 

hearing record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 


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3. All submissions must include a list of all clients, persons, and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

name, company, address, telephone, and fax numbers of each witness. 

The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202–225–1721 or 202–226– 

3411 TTD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above. 

Note: All Committee advisories and news releases are available on the World 

Wide Web at http://waysandmeans.house.gov. 

f 

Chairman LEVIN. All right, let us start. The rumor is we may 

have unusually early votes, or at least one early vote, so let me 

make a very brief opening statement—and the Ranking Member, 

my colleague, Mr. Brady, will do the same—and see if we can at 

least begin the testimony before the vote. It is not certain, but it 

is likely. 

So, today we are going to take up an important issue regarding 

the investment provisions. My feeling is this, that, by definition, 

trade issues are complex, they are controversial. And that is especially true if we believe that we both have to expand trade and to 

shape the content and the course of it. I do not think trade is automatically win-win. There are ups and downs to most trade issues. 

And I think that is the spirit within which we have to examine all 

of the key issues relating to the expansion of our international 

trade. 

So, today we are going to focus in, I think, a very constructive 

way, and take a further look on the investment provisions that are 

in U.S. trade agreements and in our bilateral investment treaties. 

As we know, these provisions were originally designed to make 

sure that the investments by U.S. citizens overseas were safeguarded, were protected from expropriation without compensation 

and without due consideration, and to make sure that there wasn’t 

discriminatory or inequitable treatment by foreign governments. 

The question today is whether we have an appropriate balance. 

And issues have been raised—and I think often in a constructive 

way, perhaps sometimes not—about the provisions in our FTAs, 

and whether the provisions today adequately articulate what would 

be called a balanced approach, issues like the minimum standards 

of treatment. 

There were some original provisions in NAFTA, as we know. And 

there then were some changes made a few years ago. The new Administration is taking a new look at trade policy, as they are at 

other key issues. And what the Administration has now done is to 

undertake a review of these investment provisions, both in our 

FTAs and in our bilateral investment treaties. And it has set up 

an advisory Committee within the State Department. The Advisory 

Committee on International Economic Policy has formed a Subcommittee to review these investment issues. 

And we are fortunate today to have the cochairs of this Subcommittee, Ambassador Alan Larson and Thea Lee. So, we welcome the two of you. I assume you will probably say that you are 


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not speaking as cochairs, but individually. But we are glad you are 

both, individuals and cochairs. 

Also testifying today is Georgetown University professor, Robert 

Stumberg—welcome—Linda Menghetti, who is from ECAT, and 

Ted Posner. 

So, we look forward to hearing from all of you. And we will hear 

your testimony after Mr. Brady gives his opening statement. 

I think the clock is not working. With 1 minute left, we will give 

you some kind of a signal. 

Also, if I might say, Mr. Brady, that I would like it very much 

if we could be as informal as possible, and each of us have Q&A, 

but see if we can have also some discussion among the five of you, 

because I think we will benefit from that. 

So, welcome. And now, Mr. Brady, your opening remarks. 

Mr. BRADY. Great. Thank you, Chairman Levin, for calling the 

hearing on investment. A hearing is exactly what we need on this 

topic. There is so much misinformation out there about the investment protections and our bilateral investment treaties and our 

trade agreements, because the investor mechanism is just so easy 

to demagogue. And, unfortunately, there will always be people who 

reflexively oppose trade. This hearing, however, is an opportunity 

to shine light on the facts and to set the record straight. 

First of all, and perhaps most importantly, we don’t need to fear 

foreign investment. As we know, it is not simply enough to buy 

American any more, we have to sell American products and goods 

throughout the world. Some of our companies can do that from 

here. Others, to compete, have to compete throughout the world. 

According to our Commerce Department, U.S. companies that 

have these foreign operations employ twice as many U.S. workers 

than they do foreign workers. Furthermore, 95 percent of the goods 

and services produced by these companies abroad are sold not back 

here, but rather, in the host or the third country jurisdictions. 

Much has been made of Buy America recently, but U.S. investment 

abroad allows us to Sell America, which is what it will take for the 

United States to lead the world out of the global economic crisis. 

The following point is perhaps already evident, but it needs to be 

highlighted. The United States is the party insisting on legal and 

procedural protection for outbound U.S. involvement. U.S. bilateral 

investment treaties and investment chapters in our bilateral and 

regional free trade agreements benefit our guys. We demand these 

provisions because they safeguard U.S. investments in foreign 

countries by shielding the investments from expropriation without 

compensation, as well as from discriminatory and equitable treatment by foreign governments. 

Put another way, the core purpose of these legal instruments is 

to raise the level of investment and property rights protections in 

foreign jurisdictions to the level of protection that already exists 

here, in the United States. 

The investor-state mechanism is designed to accomplish the 

same fundamental goal. It is meant to raise, for U.S. investors 

abroad, the level of protection—in this case, dispute settlement and 

due process rights—that exist for the equal benefit of domestic and 

foreign investors here, in the United States. In fact, investor-state 


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mechanism is often credited with helping to instill the rule of law 

in developing countries. 

In a sense, the investor-state mechanism allows the United 

States to export our Constitutional procedural due process standard to our trading partners. I have no problem with that. But I am 

sure we will hear today the investor-state mechanism exposes the 

United States to an endless stream of costly, frivolous, and invasive 

arbitration brought by foreigners. 

Well, I have looked into the allegations, and here is what my research shows. The investor-state mechanism has existed in U.S. bilateral investment treaties since the very first ones we entered in, 

in the early 1980s. It has been around for a quarter century, and 

it has never been used against the United States. We have never 

been forced to defend a single law, regulation, or administrative action in a bilateral investment treaty investor-state dispute. In the 

handful of cases that foreign investors have brought under NAFTA, 

we have not, to date, lost or settled, on unfavorable terms, one single case. 

You don’t need to take my word for it. Consider this excerpt from 

the summer 2008 issue of the Harvard Journal on Legislation, ‘‘The 

United States has never lost a single dollar in investor-state dispute under NAFTA or under any other trade agreement or bilateral investment treaty.’’ The author, our Chairman of the Ways 

and Means Committee, Charles Rangel. 

The last point I will make is that the provision the U.S.—investment chapters of our free trade agreements have evolved over the 

years. I am eager to hear the testimony on this point, because the 

evolution of the provision, it seems to me, has been in direct response to the criticism raised. 

Changes and clarifications that were made to our investment 

language include provisions to require the panels consider the 

same U.S. Supreme Court factors that U.S. courts consider when 

determining whether there has been an expropriation of property; 

provisions to allow panels to dismiss frivolous claims at an early 

stage of the proceeding; and provisions that clarify that environmental and other public welfare regulations are presumed not to 

constitute indirect expropriations. 

Furthermore, the landmark May 10th deal added language in 

our pending free trade agreements with Colombia, Panama, and 

South Korea, that foreign investors are not accorded greater substantive rights with respect to investment protections than domestic investors under domestic laws, here in the U.S. 

These changes, taken together, strike me as a compromise that 

aims for the right balance between the interest of U.S. regulators, 

on the one hand, and U.S. investment abroad on the other. 

I welcome all the witnesses this morning, and look forward to 

your testimony. Mr. Chairman, I yield back. 

Chairman LEVIN. Thank you. Right in 5 minutes. So, why don’t 

we go down the line? I am not sure of the protocol, so we will use 

how you are seated. So, Thea Lee, if you would begin, and we look 

forward to your testimony. 

All of your testimonies will be in the record. So deal with your 

five minutes or so as you would like. And, again, welcome to all of 


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you. Thank you for coming. This is really an important hearing on 

an important issue that needs to be discussed. 

Ms. Lee. 

STATEMENT OF THEA MEI LEE, POLICY DIRECTOR AND CHIEF 

INTERNATIONAL ECONOMIST, AFL–CIO 

Ms. LEE. Thank you so much, Mr. Chairman. Thank you, Mr. 

Brady. Members of the Subcommittee, good morning. I appreciate 

the opportunity to come speak to you today on behalf of AFL–CIO’s 

11 million working men and women on this important issue. 

As you all know, trade and investment issues are enormously important to America’s working families. They impact our jobs, our 

wages, our unions, and the government regulations that we count 

on to keep our communities healthy, and to safeguard our rights. 

Of course, these rules also affect workers and the environment in 

other countries. Our ultimate goal is to reform these rules in a way 

that strengthens democratic procedures, improves transparency, 

and protects workers and the environment, both here and abroad. 

Of course, we understand that we are in a global economy, and 

we will continue to be in a global economy. The question really is 

whether the investment rules that we put in place can be made 

fairer and more balanced, so that they serve the interests of my 

members, among others. 

We have had a longstanding concern over the investment provisions included in U.S. bilateral investment treaties and in trade 

agreements. We understand and support the importance of protecting the rights of investors, but we also believe that the existing 

investment provisions in U.S. investment and trade agreements are 

imbalanced in two crucial aspects. 

It’s worth remembering that the origin of these rules was, as Mr. 

Brady said, to protect outward foreign direct investment—generally 

in small, developing countries—in the bilateral investment treaties. 

It is not clear that they were designed to be a two-way street, 

where they could be used with major industrialized countries, like 

Canada, with big corporations that had presence in both countries 

being able to use them in the United States, as well as for U.S. investors, as they have an outward interest, as well. 

That is one of the key issues: whether these provisions continue 

to be appropriate, given how they have evolved and how their use 

has spread now into bilateral free trade agreements, as well as possibly investment treaties with large countries like China, where 

there may be particular concerns. 

The first problem that we see is that these agreements significantly enhance the rights of investors vis a vis governments, but 

they fail to establish commensurate responsibilities for investors, 

particularly with respect to worker rights and the environment. 

The second problem is that they give substantive rights and procedural advantages to foreign investors that are not available to 

domestic investors. This raises the possibility that investment tribunals can be used to circumvent the democratic process, and to 

achieve de-regulatory outcomes in a secretive and inaccessible 

forum. 

Certainly the experience that we have had with the investment 

chapter of the North American Free Trade Agreement and current 


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bilateral investment treaties reinforces these concerns, both in the 

inward and the outward direction. We have two kinds of concerns 

with the investment provisions—the democracy and good governance concerns as well as job concerns. I just wanted to take a 

minute to talk about why, from the labor movement’s point of view, 

these issues are important to us. 

The investment protections are designed to enhance the security 

of foreign direct investment, and address investors’ concerns with 

respect to unstable or corrupt governments where production may 

be located. In this sense, these provisions are a critical element in 

the trade agreements that we have negotiated over the last decadeand-a-half. 

The tariff reductions that we negotiate are paired with enhanced 

security of investment and upward harmonization of domestic laws 

to prevent overly intrusive regulation of foreign investment. But 

this combination both facilitates and accelerates the offshoring of 

American jobs, precisely because, for the most part, there has been 

no commensurate set of investment obligations. 

My fellow witness, Alan Larson, and I have been asked to cochair 

a subcommittee of the State Department’s Advisory Committee on 

International Economic Policy, as Chairman Levin said, so that we 

can review the draft model and present our conclusions to the Advisory Committee on International Economic Policy. We are looking 

forward to a constructive dialog with a diverse and representative 

group, and we hope that the Subcommittee will be able to take a 

fresh look at this issue and work toward consensus on how to move 

this discussion forward. 

Our key areas of concern include the investor-state dispute resolution mechanism, the failure to distinguish between legitimate 

regulatory action on the part of government and indirect expropriation, the overly broad definition of investment, the potential impact 

of these investment provisions on needed future national and global financial regulation efforts, and the need to establish commensurate and enforceable responsibilities for investors with respect to 

workers’ rights and the environment. 

Let me thank and congratulate the Subcommittee for holding 

this hearing today. It is both timely and relevant. We hope this will 

be only the first step in a more comprehensive review of U.S. trade 

and investment policy aimed at supporting the creation of good jobs 

at home and abroad, and laying a foundation for sustainable democratic and equitable development. 

Thank you very much, and I look forward to your questions. 

[The statement of Ms. Lee follows:] 


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Chairman LEVIN. Gee, you did this in exactly 5 minutes. 

Ambassador. 

STATEMENT OF ALAN P. LARSON, SENIOR INTERNATIONAL 

POLICY ADVISOR, COVINGTON & BURLING LLP 

Mr. LARSON. I will try to do as well. Chairman Levin, Ranking 

Member Brady, and Members of the Subcommittee on trade, my 

name is Alan Larson. I am an economist, a senior international 

policy advisor at Covington & Burling, and a former under secretary of state for economics under the Administrations of George 

W. Bush and William Clinton. 

International investment plays an essential role in sustaining 

the economic health of the United States. Inbound investment puts 

foreign capital to work in our countries, supporting output and 

jobs. It also bridges the gap between our low national savings rate 

and our large investment needs. 

During the recent global, financial, and economic crisis, international investors have made investments in troubled U.S. companies, including in financial services firms and automobile companies, that have been very, very valuable to our economic strength. 

Outbound investment also is valuable. It opens access to and increases supplies of critical raw materials. It also provides channels 

through which a substantial share of U.S. exports flow. 

International agreements help provide a stable and predictable 

legal and regulatory environment for international investment. Bilateral investment treaties, for example, provide assurance of nondiscriminatory treatment, specifically most favored nation treatment and national treatment, subject to clearly specified exceptions. They also provide a minimum standard of treatment grounded in customary international law. This standard is expressed in 

the concept of fair and equitable treatment. 

Investment treaties limit the circumstances under which a host 

government can expropriate an investor’s property. And, if an expropriation does occur, they require prompt, adequate, and effective 

compensation. The expropriation clause of bilateral investment 

treaties is modeled closely on the takings clause of the United 

States Constitution. 

The BITs also provide investor-state dispute settlement through 

international arbitration. The model BIT that is used as the template for launching negotiations with a new partner has periodically been reviewed and revised, with the last review taking place 

in 2004. 

I am honored to be serving, along with Thea Lee, as cochair of 

a private sector advisory panel that will contribute input to the Administration’s review of the model bilateral investment treaty. As 

you said, Mr. Chairman, our report will go to the Advisory Committee on International Economic Policy, which itself is a private 

sector advisory Committee established under FACA. 

Thea and I intend to assemble a panel of private sector experts 

with a variety of points of view that can inform our deliberations 

and inform the report that we will provide for ACIP. This report, 

I understand, will be part of a broader outreach process on the part 

of the government that could include such things as public hearings and a notice and comment process. 


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For the purposes of our panel, I expect we will want to look at 

the experience of the United States with international investment 

agreements, we will want to consider the role that these agreements play in the new economic circumstances our country now 

finds itself in, and will want to consider whether we have recommendations on how these agreements—agreements I consider to 

be very, very good agreements—could be made even better. Thank 

you, Mr. Chairman. 

[The statement of Mr. Larson follows:] 


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Chairman LEVIN. Thank you very much. 

Mr. Posner, welcome. You have been in this room before. Welcome. 

STATEMENT OF THEODORE R. POSNER, PARTNER, 

INTERNATIONAL TRADE GROUP, CROWELL & MORING 

Mr. POSNER. Indeed, I have. And it is very good to be back. And 

I thank you, Mr. Chairman, and Ranking Member Brady and Members of the Subcommittee, for the opportunity to testify today. My 

name is Ted Posner, and I am a partner in the international trade 

and international arbitration groups at the law firm of Crowell & 

Moring. 

Prior to my return to private practice at the beginning of this 

year, I had the good fortune to work on the law and policy of international investment, both in the congress and in the executive 

branch, including as your trade counsel, Chairman Levin, then as 

trade counsel to the Senate Finance Committee, where I was deeply engaged in drafting the investment-related provisions of the Bipartisan Trade Promotion Authority Act of 2002, and then, as an 

attorney in the Office of the U.S. Trade Representative, where I 

participated in most of the negotiations under the 2002 framework, 

as well as in the 2004 revision of the model Bilateral Investment 

Treaty, to which Ambassador Larson alluded a moment ago. 

Today I want to make three points. First, investment protections 

in bilateral investment treaties and free trade agreements, together 

with the availability of a neutral forum in which to assert those 

protections, provide an essential set of rights to U.S. persons doing 

business in a globalized economy. They facilitate precisely the kind 

of economic activity we should be encouraging in our efforts to reverse the economic downturn. 

Second, a sustainable international investment policy requires a 

balancing of interests. As Chairman Levin said in his opening remarks, the question of the day is, ‘‘Have we achieved that appropriate balance?’’ I contend that that balance was achieved in the 

Trade Act of 2002, and that no development since then warrants 

a disrupting of that balance. 

And, finally, I want to note that discussions of this topic frequently have been muddied by misunderstandings of what BITs 

and FTAs require of host governments, and what they don’t require. And I would like to clarify a few of those misunderstandings. 

To appreciate the value of investment treaties and agreements, 

it is useful to consider the situation that a U.S. investor faces in 

a foreign country in the absence of such instruments. As a practical 

matter, in the absence of treaty protections or domestic legislation 

providing for international remedies, that investor can rely only on 

the rights afforded by the domestic law of the host country. Often 

those rights will not be easily accessible to an outsider. 

And to defend its rights, the investor’s only recourse usually will 

be the local court system, which will require the investor to be familiar not only with local substantive law, but also with all of the 

technical aspects of local procedural law and customs. 

If that fails, the investor may seek the assistance of the U.S. 

Government, in which case its interests will be competing with diplomatic, national security, and other interests. And, if the investor 


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is doing business in multiple countries, its familiarity with its legal 

rights in one will give it no comfort in others. 

A treaty or agreement changes all of that. It puts the relationship between the United States investor and the host country on 

an international law footing. Now, the investor is protected not 

only by the domestic laws of the host, but also by a set of rights 

that is common across multiple countries. And that investor is able 

to assert those rights before a neutral tribunal under rules that 

will vary only slightly from agreement to agreement. 

By facilitating investment in this way, investment protections 

serve as an engine of economic growth. Critics of this view say that 

it gives undue weight to the interest of companies doing business 

abroad, while giving insufficient weight to the interest of investors 

and consumers in the U.S. market. 

The treaty obligations the United States negotiates are reciprocal. Critics argue that more attention should be paid to how 

those obligations constrain the United States, as host to foreign investment. In fact, there was a very vigorous debate on this very 

issue during the drafting of the Trade Act of 2002, when I was 

serving as counsel to the Senate Finance Committee. The outcome 

of that debate was a balancing of the interests of the United States 

as both exporter and importer of investment. 

The 2002 Act calls on negotiators to pursue investment protections, similar to those contained in earlier treaties and agreements, 

but the Act also takes account of U.S. defensive interest in several 

notable respects, including the well-known ‘‘no greater substantive 

rights’’ objective, standards with respect to expropriation that Ambassador Larson alluded to earlier, a transparent dispute settlement process—and a dispute settlement process, I would add, that 

is to include mechanisms to deter the filing of frivolous claims. 

The message of the 2002 Trade Act was heard loudly and clearly. 

The agreements we have negotiated since then have adhered closely to those objectives. And with respect to the question of the day, 

‘‘Should that balance achieved in 2002 be adjusted or disrupted in 

some way?’’ I would respectfully submit that the answer is no. As 

I have said, no developments in the intervening 7 years suggest 

any reason to dispense with the balance reflected there. 

I would also say, as a former negotiator, that changing those objectives, and trying to impose new obligations on our foreign counterparts will be a substantial challenge, perhaps an insurmountable one, leaving U.S. investors without the protections that their 

foreign competitors receive under other countries’ BITs and FTAs. 

I will leave it at that, Mr. Chairman. I see my time is up. I 

would refer to my written testimony with respect to some of the 

misunderstandings about obligations under BITs and FTAs I referred to earlier. Thank you. 

[The statement of Mr. Posner follows:] 


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Chairman LEVIN. Professor, if you take five, and, Ms. 

Menghetti, if you take five, then we will go and vote and we will 

come back. 

Professor, your 5 minutes. 

STATEMENT OF ROBERT K. STUMBERG, PROFESSOR OF LAW 

AND DIRECTOR OF THE HARRISON INSTITUTE FOR PUBLIC 

LAW, GEORGETOWN UNIVERSITY LAW CENTER 

Mr. STUMBERG. Good morning, Mr. Chairman. Congressman 

Brady, if I may begin with your introduction to the issue, I agree 

that U.S. negotiators have struck a balance between the twin mandates, on the one hand to protect the interests of American investors abroad, and on the other hand, to assure that no greater rights 

go to foreign investors. 

I also agree that the language of the most recent agreements reflects that kind of compromise. Because it is a compromise, my 

view is that the United States has not achieved the goal of no 

greater rights, and I would like to make three points to explain 

why. 

First, I would like to talk about the change in countries with 

which we are negotiating, and raise the question as to whether one 

size fits all. That is to say, does one model for an investment agreement work in every case? 

The free trade agreement with Australia shows that one size 

need not fit all, because both countries agreed in that agreement 

that investor-state arbitration was not necessary. Why? Because 

both countries had functioning courts, and because both countries 

have cross-investments in each other which, if there were investor 

rights, might cause a risk of investor-state litigation. 

Korea—an agreement that is on the table which may soon come 

to this congress—sounds a lot like Australia. It is a country in 

which there is lots of investment going both ways. And both American and Korean courts work. So why is investor-state arbitration 

part of a proposed free trade agreement with Korea? 

Another agreement that is on the table—Panama—raises interesting questions because the government of Panama, through a variety of banking tax and regulatory policies, is recruiting companies 

to place, their corporate domicile in Panama to escape taxation or 

regulation in their home country. Panama has a creative and aggressive legal industry that has recruited, to date, over 350,000 foreign companies to establish a domicile in Panama. 

So, essentially what you have is a country that has embarked on 

a strategy of attracting the kind of companies that would, if they 

could, use investor-state arbitration if their interests are affected 

by policy in the United States. 

Last year, the United States also began negotiations on a bilateral investment treaty with China. Those negotiations are now suspended. China is interesting, just because of its size. Presently, 

there is only about a billion of Chinese foreign direct investment 

in the United States. 

But, as you all know, China has accumulated a humongous surplus in trade with the United States, and at some point is going 

to start reinvesting that money in more profitable investments. 


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And there is a lot of pressure for China to follow the successful investment path of Japan, which was in a similar position. 

If China does so, and starts moving billions into the American 

economy, it is likely to buy assets or shares in American companies 

that implement its distribution chain. So, for example, that might 

look like companies like Wal-Mart or Target or Sears, icons of 

American retail commerce. 

If you are thinking long term, anticipating that within 30 or so 

years the Chinese economy is projected to be about the same size 

as the U.S. economy, you can anticipate that so-called American 

companies could have the benefits of investor-state arbitration. So, 

a big chunk of the economy could opt out of U.S. courts if they 

wanted to, and instead look to the investor benefits. 

Let me conclude by referring to a case that is now active, and 

it is rumored to be very close to a decision, the Glamis Gold case 

against the United States. It allows me to illustrate the issue of investor rights with respect to two questions. 

First, who is a foreign investor? The Glamis Gold company started as a Canadian company with mines in Canada. It then sold its 

Canadian assets and established subsidiaries in the United States. 

Now its holdings are in the United States, Mexico, Honduras, and 

Guatemala. So, it essentially is a binational company that is able 

to take advantage of the free trade agreement to bring its claim 

against the United States. 

The big issue is the minimum standard of treatment. And the big 

question there is whether a change in the reclamation standards 

adopted by the State of California amounts to a violation of the 

agreement. 

The United States Department of State argues that a change in 

the law does not violate the agreement, because the recent language, assuring that there are no greater rights, says that it is not 

a denial of justice for the law to change. Glamis, on the other hand, 

argues that there are plenty of NAFTA cases it can cite to show 

that the standard of minimum treatment can evolve, and should 

assure a stable regulatory environment, which means the government has a duty not to change the law, once a company like them 

has a mining claim in effect. 

What this shows, in conclusion, is that these agreements allow 

for a narrow interpretation—one which is argued by the U.S. State 

Department, in its brief—or, they are interpretations that allow for 

a broad reading of the minimum standard of treatment. 

This is the fundamental ambiguity that exists also with respect 

to protections from expropriation and protections with respect to 

national treatment. 

[The statement of Mr. Stumberg follows:] 


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Chairman LEVIN. Thank you very much. Ms. Menghetti? I think 

the bell will ring when we have 5 minutes left. So even though the 

clock is not working, the bells are. 

STATEMENT OF LINDA MENGHETTI, VICE PRESIDENT, 

EMERGENCY COMMITTEE FOR AMERICAN TRADE 

Ms. MENGHETTI. Thank you, Mr. Chairman. Congressman 

Brady, Members of the Subcommittee, thank you for the opportunity to appear before you today on behalf of the Emergency Committee for American Trade, ECAT, an association of the chief executives of leading U.S.-based business organizations with global 

operations. 

Let us make no mistake. U.S. investment overseas is squarely in 

the U.S. economic and our broader national interest. With 95 percent of the world’s consumers and 80 percent of world purchasing 

power outside the United States, U.S. industries need to be fully 

engaged internationally to remain competitive. U.S. investment 

overseas largely complements U.S. activities here at home. It is not 

a substitute for them. 

U.S. companies that invest abroad export more. They expend 

more on research and development here, in the United States, and 

they pay their U.S. workers 24 percent more than purely domestic 

companies. In order to secure these benefits, the United States has 

long undertaken a program to protect investors who oftentimes find 

themselves in jurisdictions with weak rules and/or weak court systems. 

The modern version of this program is the BIT and trade agreement system. The investment protections in these international instruments are based on core principles of U.S. law, from the 

Takings, Equal Protection, and Due Process Clauses of our Constitution, to the protection against arbitrary and capricious government action in the Administrative Procedure Act. 

U.S. investors have relied upon these provisions to successfully 

address foreign government action that is discriminatory, 

expropriatary, or otherwise violative of core principles. They have 

won cases under a number of U.S. BITs, including with Argentina, 

Ecuador, Poland, and Turkey, and under NAFTA in cases with 

Canada and Mexico. 

Such provisions are now more important than ever, particularly 

as some countries, including those in our own hemisphere, are 

turning their backs on basic international obligations and rules of 

fairness. And they are equally vital as we look to the negotiations 

with India and China. For U.S. companies to be able to penetrate 

those markets successfully, we need these types of instruments to 

address the unfair and discriminatory barriers that we find in 

those markets. 

In many more instances, cases are never filed, as these clear 

rules promote the amicable resolution of disputes. 

The United States has been a defendant in only a small number 

of cases. Where decisions have been issued, the United States has 

prevailed on the merits in decisions that reflect the high standards 

for which these arbitration panels are well known. And there has 

been no onslaught of cases, as some claimed might happen. About 

50 cases have been filed in the past 14 years of NAFTA, overall. 


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This is less than a third of the cases filed every year in U.S. court 

on federal Takings claims alone. 

Between 2001 and 2004, the U.S. Government engaged in an extensive review of the previous 1994 model BIT, and considered the 

same issues that we are discussing today. The outcome, the 2004 

model BIT, represented a substantial change from the earlier 

model. And, unfortunately, it narrowed and weakened some of the 

protections for U.S. investors overseas. Notably, these provisions 

have not been tested, as no case has been decided on the substantially changed new model. 

The proposals that are being discussed here today raise some 

very serious concerns for U.S. industries investing overseas. Further incorporating the no greater rights language, for example, 

would reverse decades of U.S. support for strong and binding international rules that largely benefit the United States and its investors. Such an approach would have little effect on challenges to the 

United States, since these investment protections are already 

largely consistent with U.S. laws and jurisprudence. And, at the direction of Congress, the 2004 model BIT moved the United States 

to even greater conformity. 

While the benefit for the United States as a potential defendant 

is, at best, minimal, the risk for U.S. companies is great. Other 

countries will insist on relegating U.S. investors to local standards, 

negating the purpose of the BITs, and subjecting investors to weak 

and sometimes corrupt legal systems. 

On regulatory issues, let us be clear. Investment rules simply do 

not prohibit the bona fide nondiscriminatory application of legitimate regulation. And none of the NAFTA cases demonstrate otherwise. 

I urge you to reject proposals to embrace blanket exceptions for 

government actions to protect the environment and public welfare. 

The United States itself does not impose such exceptions in the Administrative Procedure Act, in the Takings clause, in the Equal 

Protection, or in our other legal principles. To establish such a safe 

harbor would allow foreign governments to expropriate U.S. property to the detriment of U.S. companies and their workers. 

U.S. leadership is essential to promote a stronger international 

investment climate to benefit the U.S. economy, U.S. companies, 

and U.S. workers. ECAT looks forward to working with this Committee and the Administration to achieve that objective. Thank 

you. 

[The statement of Ms. Menghetti follows:] 


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Chairman LEVIN. All right, thank you very, very much. Unfortunately, as you know, everything is unplanned around here, at most. 

We have five votes. And one of them is going to be a longer vote. 

So, be patient with us. I think we may take the materials that 

we have and read them while we have votes, so we will come back 

with even sharper questions. 

So, thank you. Your testimony has been really excellent. We will 

be back. It will be a half-an-hour, I think, anyway. Maybe longer. 

[Recess.] 

Chairman LEVIN. Let us reassemble. I will not apologize, because I do not want to apologize for congressional procedures. But 

as soon as Mr. Brady arrives—several of my colleagues told me 

that they were rearranging their schedules. This was not expected, 

these five votes. 

So, we will just wait for Mr. Brady. And others will filter in 

again. We very much appreciate your patience. 

[Recess.] 

Chairman LEVIN. Okay. So, we will start and others will join us. 

As we ask questions, let me urge that, to the extent we can, that 

we focus less on direct foreign investment, the need for it, because 

it is here to stay, in some degree—in major degree—and more on 

the structure of investment and how we handle the issues that 

arise from it. 

And the number of issues—and, by the way, as we know, the 

rules have changed in the last years. It isn’t as if we are dealing 

today with the precise language of a number of years ago. And so, 

I think if we can focus in on the structural issues, the important 

ones, it will be helpful. And a number of those issues have been 

raised. And let me just kind of quickly touch on them. And then 

maybe some of you pick them out and comment. 

Issues have been raised about the transparency of these tribunals. Issues have been raised about one-size-fits-all. And I think, 

more and more, we have understood that one size doesn’t fit all. 

And issues have been raised, you know, why Australia and not 

Korea, in terms of exclusion of that provision. 

Also, an issue has been raised about subsidiaries. As we have 

more and more a globalized economy, there are going to be more 

and more subsidiaries of American-based companies. And what 

should be done about that? 

And also, as we discuss this, let me just remind us that, as I 

said, there have been changes. And in recent agreements, there has 

been—this is a total surprise. All right, let us go on for—what is 

happening is we now have a controversial issue on the floor. 

Enough said. 

You know, in recent documents, there has been included the provision, ‘‘Except in rare circumstances, non-discriminatory regulatory actions by a party that are designed and applied to protect 

legitimate public welfare objectives, such as public health, safety, 

and the environment, do not constitute indirect appropriations.’’ 

That is relatively new language. 

Plus, the language that some of you have referred to, ‘‘Foreign 

investors are not hereby accorded greater substantive rights,’’ and 

I won’t read the rest of it, because I think you know. 


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So, pick out any of those issues. You have varying points of view. 

Take your pick, and help inform us. Shall we go down the row? Ms. 

Lee, do you want to pick out any one of the five that have varying 

positions to them? Yes? 

Ms. LEE. Sure. And let me say that I think there has been movement in the right direction: in the 2002 Trade Act; and in the 2007 

agreement that was reached around the trade agreements, we are 

moving in the right direction. 

Let me just say one thing briefly, then let my colleagues come 

in, on the preambular language in the May 2007 deal that is in the 

Peru and other pending trade agreements that asserts that there 

shall be no greater substantive rights for foreign investors. 

My question is whether that is sufficient, to state in the preamble that there are no greater substantive rights when you have 

the language, which is very different. Both the procedures and the 

substance of the investment rights remain different from what is 

available to domestic investors. 

Just on the face of it, having the ability to use investor-state dispute resolution is a greater right than what a domestic investor 

would have. And so, on the face of it, unless we pull that back pretty substantially, that is a greater right, and it’s in conflict with the 

preambular language. 

I am not a legal scholar, but I have been trying to read up on 

all these issues, in terms of the definition of minimum standard of 

treatment and indirect expropriation. It seems to me that the investment language in international agreements still does not comport exactly with the takings language in U.S. law, and that you 

have a decision that is made by a different group. The final decision is not looked at by U.S. courts, it is looked at by these international arbitral groups that do not have the same familiarity with 

U.S. law, or the same history, and so on. 

And so, on the face of it, I still think we are at a place where 

we continue to have both substantive and procedural issues that afford greater rights, whether we state that they shouldn’t or not. 

And that is what I hope we can look at, going forward. 

Chairman LEVIN. Ambassador, why don’t you take a pick, any 

of those issues or any other issue? 

Mr. LARSON. Could I say one sentence about two or three of 

them? 

Chairman LEVIN. Sure. 

Mr. LARSON. Okay. On transparency, as the chairman of the 

U.S. chapter of Transparency International, I think it is very important, and I appreciate the fact that there are two extensive 

clauses in here about transparency. I hope we can see whether 

those are adequate. 

On annex B, I know from the research that Thea Lee and I will 

hear from people who think it doesn’t go far enough and people 

who think that it has gone too far. And so that is going to be an 

interesting part of the work of the panel that she and I will be 

working on together. 

The last comment I would offer is, Mr. Chairman, on your last 

point about no greater substantive rights. I mean, I think the challenge for U.S. negotiators is that in many—for U.S. foreign investors in other jurisdictions, we want to obtain greater substantive 


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rights for our investors than domestic investors may have in those 

countries. That is sort of the value of the BIT. 

We understand, as negotiators, that we would generally want to 

offer as little as possible, in terms of, you know, the substantive 

benefits that foreign investors might get under a BIT here. But 

there is clearly a tradeoff between what we want for our investors 

in some of the jurisdictions, and what we want to give up, in terms 

of rights for foreign investors in our country. 

Chairman LEVIN. Let me just have a quick conference. So, we 

have one vote. Why don’t we do this? Mr. Brady, why don’t you 

take over, and I will go—if you don’t mind—and I will have the 

staff take down your question and the answers. And you kind of 

take over for 5 minutes. I will come back, and why don’t you now 

go and vote, and then you will be next when you come back. Okay? 

So, if you—is that okay with you? 

Mr. BRADY. No, that is great. 

Chairman LEVIN. Okay. And our staff will take down your question, and also the answer. 

Mr. BRADY. Can I pass some legislation while you are away? 

[Laughter.] 

Chairman LEVIN. I think someone would call for a quorum, I 

think. 

Mr. BRADY. Thanks Chairman, very much. Thank you. And, 

again, I think this panel—I will be quick. Thanks, Chairman. 

I wanted to visit a little about, one, I think the panel’s points 

have been really well made. I want to focus a little on the benefits 

and the improvements that have been made in these provisions 

over the years. 

And if we could, look at the slide panel up there, sort of focusing 

first on what Ms. Menghetti had to say about the importance of us 

selling American products and services throughout the world. 

Ninety-five percent of the consumers live outside the United States. 

Selling—those sales are a huge part of our economy. 

This investment provision, in various forms, has been put in 

place now for more than a quarter of a century. The purpose is to 

protect our investments overseas. Some of our companies can export from here. But if we want a Hewlett Packard to compete with 

computers around the world—Procter and Gamble with home products, Coca Cola with their beverages—they often times have to 

compete in that region to either produce or service or maintain 

their market share. 

And the investment option has been a protection we have insisted upon to make sure that in countries that we are in, where 

their judicial system perhaps isn’t as mature as ours, their investment property protections aren’t as strong as the United States’. 

We’ve wanted to make sure our investors have the option to pull 

out and go to that dispute resolution process, that arbitration process. Again, a panel that both parties agree upon, a panel that creates consistent—a legal framework to resolve these issues. 

What we find is that the U.S. has used this successfully throughout the years to resolve disputes. California-based Metalclad successfully used NAFTA to challenge issues in Mexico. S.D. Meyers, 

from Ohio, the same with Canada. We have had U.S. companies 

challenge bilateral investment trade issues in Poland to our benVerDate Nov 24 2008 01:06 Jan 27, 2010 Jkt 053473 PO 00000 Frm 00068 Fmt 6633 Sfmt 6602 E:\HR\OC\53473.XXX GPO1 PsN: 53473

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efit, Motorola in Turkey, Occidental in Ecuador, CMS and Sempra 

in Argentina, all again using this provision to protect U.S. investors. 

But if you look at the number of foreign investors who have used 

this process to successfully challenge the U.S., you will see a blank 

piece of paper, because it hasn’t been done. They have brought no 

lawsuits under bilateral investment treaties, none under our bilateral FTAs, and 15 to 17 under the NAFTA provision. 

One of the reasons is because, for a foreign investor, the use of 

going to the arbitration is somewhat redundant, in that they have 

very strong protections already in the U.S. law and Constitution. 

And when they do challenge it, what they find is, again, the U.S. 

provisions from takings to due process and transparency issues all 

incorporated in that dispute resolution process, all of which has 

helped us. 

So, Ms. Menghetti, do you—the belief that this works against 

U.S. interests, do you find that to be a credible argument? 

Ms. MENGHETTI. Congressman Brady, I do not find that to be 

a credible argument. 

In the NAFTA cases that have gone forward—and there haven’t 

been that many of them, as I said, compared to what happens 

every year in a very small area of U.S. jurisprudence—but in all 

the NAFTA cases, you know, folks might be able to say, ‘‘I don’t 

like this one statement that the panel said here,’’ or, ‘‘This one 

statement that they said there.’’ But in all the cases that were decided for investors, if a U.S. court were considering that case, the 

investor too would have won, and that is because the principles in 

these treaties are very close to—and, frankly, based on—the principles we have in our own jurisprudence. 

In 2004, the model BIT was revised substantially, and in some 

ways made things worse, I would argue, for U.S. investors overseas. And we incorporated—and I can’t think of any other international agreement that does this—we incorporated directly language from the leading Supreme Court case on indirect expropriation into the text of our expropriation annex. 

Mr. BRADY. Yes. 

Ms. MENGHETTI. The problem, I think, for U.S. investors is 

really we don’t have enough of these instruments. There are over 

2,000 bilateral investment treaties worldwide. The United States is 

party to about 40 of them, and about 15 more with countries 

through our FTAs. 

There are treaties with China between Germany and the Netherlands that have investor-state and strong protections against expropriation. Our companies don’t have that. Many OECD countries 

have investment treaties with Korea that have investor-state. If, as 

was proposed, we took out investor-state from our FTA with Korea, 

our investors, our businesses, our economy, and our workers would 

be the worse off. 

Mr. BRADY. So it is a competitiveness issue, as well? 

Ms. MENGHETTI. Absolutely, it is a competitiveness issue. 

Mr. BRADY. And that, you know, there has been a concern 

raised over the years that this provision could be used to challenge, 

you know, state and local environmental regulations. But you 

know, improvements in this—one, that hasn’t happened. 


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Ms. MENGHETTI. That has not happened. 

Mr. BRADY. Successfully. But, two, I get the impression that improvements made in 2002 in the Trade Act, and then again in the 

May 10th provisions are now parts of our Peru, Panama, Colombia, 

and South Korea free trade agreements. 

Mr. Posner, you talked about how those improvements have 

taken what is, at its basics, a way to export our Constitutional protections, and improve even greater upon it over the years. Can you 

expound? 

You are always looking for ways to improve provisions in trade 

agreements. Have we seen improvements, and have they been good 

for us? 

Mr. POSNER. Well, I think we have seen improvement, to the 

extent that you had a debate on the appropriate balance between 

protecting the interests of U.S. investors seeking to do business 

overseas, and the so-called defensive interests, taking account of 

the risk that the United States might be sued with respect to a regulatory action. 

So, I see where we are today as an improvement over, say, where 

we were in 1982, in the sense that we have now had that debate 

and achieved that balance. 

In terms of how would any of the improvements that we have 

made be interpreted by a panel, what would happen if you had a 

case that raised, say, an indirect expropriation and the panel had 

to interpret the annex that a number of people have referred to, 

how would it do it? What would the conclusion be? It is hard to 

say, because we haven’t had that case yet. 

So, all we can do at this point is make best guesses, based on 

what I think was our good lawyering, frankly, and our best efforts 

to accurately reflect the balance that was articulated in the 2002 

Act. And I think we have done that. So, in that sense, in coming 

from where we were in 1982, when this program really got going, 

to where we are today, yes, I think we have improved because we 

are more balanced. 

Mr. BRADY. Thank you, Mr. Posner. Ambassador, there is a concern that foreign investors could use this provision to challenge our 

state and local environmental laws. Yet we have seen states like 

California—very aggressive on environmental issues, whether it is 

clean air, toxic pits clean-up, Water Quality Control Act, health 

and safety code laws, just in the last—well, just in the last number 

of years, again, aggressive in environmental actions—unchallenged 

by foreign investors, probably more heavily challenged by U.S. domestic companies that have a different view of it. 

Do you see the improvements that have been made over the 

years as eliminating or restricting greatly the possibility that that 

could occur successfully? 

Mr. LARSON. Mr. Brady, I was in government at the time that 

the 2002 Trade Act was enacted. And the 2004 changes in the 

model BIT were made, and so obviously I was a part of that. And 

I agreed that they represented a good balance. 

I have been out of government since then. And I know, from the 

preparation that I have done, along with my colleague, Thea Lee, 

that there have—continue to be concerns expressed about this 


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issue. There have been concerns expressed on both sides of it, 

frankly. 

And so, I am certain that this will be a part of the deliberative 

process that we will be co-chairing. I am going to be very interested 

in hearing the respective views that get expressed. I am going to 

not express a view of my own, since I will be co-chairing the process—— 

Mr. BRADY. Yes. 

Mr. LARSON [continuing]. Except to say that, you know, it is 

public record that I was a part of the process that brought us to 

where we ended up in 2004. 

Mr. BRADY. Thank you, Ambassador. And, Chairman, I will run 

and vote. 

Chairman LEVIN. Okay. 

Mr. BRADY. Thank you. 

Chairman LEVIN. Thank you very much. Mr. Doggett is recognized. 

Mr. DOGGETT. Thank you, Mr. Chairman. I have been raising 

concerns about investment provisions in our foreign trade agreements. I believe, first, in this Committee in 2001. Modest improvements have been made, but I think your decision to conduct this 

hearing is constructive, and each of the witnesses has offered constructive testimony looking at this. 

I can say, first, what I agree with. I agree with Mr. Brady fully 

in his opening statement that our goal is to help bring other countries up to American standards. Our goal, however, should not be 

to give foreigners more rights than Americans have. And simply 

putting it in the preamble, as Ms. Lee noted, is constructive, and 

a big change, but it may not be sufficient, by itself. 

I think that there are several issues the witnesses have touched 

on that I will, as time permits, explore. One is the decision of when 

it is that we decide we need to use these investor panels to protect 

investment interest. As you noted in your comments, Mr. Chairman, the question of whether we will have foreign investment here 

or American investment abroad, that is not at issue. I support that 

concept fully. It is a question of how that investment impacts the 

ability of states and localities and the Federal Government to provide meaningful protection to the environment, to health and safety. 

So, the first question that has to be asked, I think—and I don’t 

believe that USTR has had any real set of guidelines about how to 

do this—is whether you need any investment agreement or not, or 

whether, as we determined with Australia, that their courts are 

adequate to handle this. 

There is, for an example, the decision to include investor panels 

for Korea. There is a body of case law in this country on forum non 

conveniens that Korea provides, through its judicial system, an 

adequate forum. And, therefore, cases have been dismissed that 

would be brought here, because it’s maintained that Korea, 

through its court system, provides an adequate system. 

Now, if I were a trade lawyer, and I had the choice of going to 

a Korean court or going to a panel of other trade lawyers who that 

day, instead of being advocates, were arbitrators, I think I would 


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clearly prefer the arbitrator panel. But that doesn’t mean that’s 

what is in the best interest of the American public. 

And so, looking at the way USTR determines whether to have an 

investment agreement, and whether we have adequate and clear 

standards as to whether they make that decision, is one very important decision. 

I think that the changes that have been made in some of the 

agreements that are now being relied on as a reason not to do any 

more are there because a few of us raised these complaints about 

the lack of transparency. There is some progress that has been 

made there. But we need to put those rights to make them meaningful. 

And the fact that the United States has yet to have a ruling 

against it, I think has to be considered against the backdrop of the 

fact that the trade lawyers who are the arbitrators in these panels 

are well aware of what the impact would be if the United States 

did lose a major decision. 

Having raised some of those points, let me begin, Professor 

Stumberg, by asking you about the issue of Panama. I am pleased 

that, from this witness stand, Secretary Geithner endorsed the legislation that Carl Levin and I have to stop tax havens. And my concern is that not only are taxpayers being fleeced by corporations 

who buy a mailbox in Panama or some other sandy beach country, 

but I am also concerned about how the subsidiaries of American 

corporations can be used to launch an assault on decisions that are 

made by a state legislature. 

You and others have suggested that these investment provisions 

could easily be manipulated to use foreign subsidiaries to gain 

rights that the American corporation wouldn’t have if it simply 

brought a case directly in Federal court here. Why should we be 

concerned about this type of forum shopping by multi-nationals 

who don’t want to file a claim in an American Federal court? And 

is this already happening? And is there any particular concern 

when it comes to Panama? 

Mr. STUMBERG. Perhaps it would be helpful to not talk so 

much theory, but to take an example. Panama is controversial because of its banking law, the degree of anonymity or secrecy that 

financial institutions or investment banks or hedge funds can 

maintain in Panama, versus the United States. 

So, your concern about subsidiaries is best understood when you 

think about the corporate structures of companies that the U.S. 

Government cares about. Most of the big banks and financial institutions that are involved in the current financial crisis, and who 

are sometimes benefiting, sometimes not benefiting from the bailout measures, are U.S. companies with domiciles in the United 

States, and they also have subsidiaries in Panama, which they 

manage for accounting, tax, and other investment purposes. 

There is an interesting and disturbing arbitration decision related to financial services that came out of the Czech Republic just 

2 years ago, the Saluka case. In the late 1990s, the Czech Republic 

was coping with a crisis of toxic assets. Ironically, the toxic assets 

were the result of banks shifting out of the control of a Communist 

state economy. 


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The government was forced with either letting some institutions 

fail, or bailing them out sufficient to maintain stability in the system. The Czech government bailed out the so-called Big Four, 

under the theory that they were too big to fail. Those happened to 

be the four banks in which the Czech government held the biggest 

equity stake. Sound familiar? 

A bank that was operating in Czechoslovakia, domiciled in The 

Netherlands, and owned by a Japanese holding company, took advantage of the BIT between the Czech Republic and The Netherlands. It brought a claim focusing on the minimum standard of 

treatment, which includes fair and equitable treatment. 

When all was said and done, the ruling was that the Czech Republic had violated the minimum standard. Its argument that the 

bail-outs were a prudential measure, because the banks that it 

bailed out were too big to fail, was not a sufficient objective. It was 

not a sufficient rationale for explaining why it was helping those 

banks and not the bank owned by the Dutch institution and the 

Japanese holding company. 

The arbitrators ruled against the Czech government, and the 

amount actually is still in question. The latest I heard was that 

they were seeking in the range of 3.6 billion crowns. I haven’t converted what a Czech crown is, compared to a euro or a dollar. 

That’s a real case, and it shows you that subsidiary structures 

matter. The companies can legally strategize to take advantage of 

BITs and free trade agreements, and the financial service sector is 

a huge and looming issue, because many investors and many institutions were virtually wiped out. Why do some get the bail-out and 

some don’t? 

Chairman LEVIN. Okay. Your time is up. Let me suggest this, 

that we move on. And, Mr. McDermott, you are next, I think. 

Dr. MCDERMOTT. Thank you. 

Chairman LEVIN. But before—if you don’t mind, if—when I 

went down the row, I skipped three, Mr. Posner, Professor 

Stumberg, and Ms. Menghetti. 

Ms. Menghetti—if you don’t mind, Mr. McDermott—you want to 

take 30 seconds, just on this issue, and then we will come back to 

you? 

Ms. MENGHETTI. I—— 

Chairman LEVIN. Just so we have some back and forth. 

Ms. MENGHETTI. Absolutely, Mr. Chairman. I don’t know the 

precise terms of that treaty—which was not a U.S. BIT, right? I do 

know that our BIT has very strong requirements, and denial of 

benefits under Article 17 requiring substantial business activity for 

the plaintiff in one of these cases. I would have to look into this 

other bit a lot further. I don’t believe that that type of scenario can 

happen here. 

Two other quick points, though—— 

Chairman LEVIN. Okay, let me suggest this. I don’t want to take 

too much of Mr. McDermott’s time right now. 

We will come back to that, okay? So you have more—I just wanted you to have a little time to have some back and forth. So my 

colleague and friend, Mr. McDermott—— 

Dr. MCDERMOTT. And I assume, Mr. Chairman, too, you are 

welcome—and I would like to hear her other two points. Since we 


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don’t have time for them right now, they can supplement in writing 

so that we will have that. 

Chairman LEVIN. Absolutely, absolutely. 

Dr. MCDERMOTT. Thank you. 

Chairman LEVIN. We are going to see how long you can go and 

how long we can go. And there may be another vote interrupting 

us, because this is a controversial issue before us. It’s the supplemental. 

So, Mr. McDermott, you are next. 

Dr. MCDERMOTT. Thank you, Mr. Chairman, I guess, for having a chance to ask questions. 

I would like to ask the panel. Is it right to assume that only investors have a private right of action? Mr. Posner. 

Mr. POSNER. Yes, there are certain threshold questions in investor-state dispute settlement. To be a claimant, to actually be 

able to bring a claim to arbitration, you have to be an investor of 

a Party. You have to have an investment in the territory of the 

other Party. Or, in some cases, we have what’s known as pre-establishment rights. 

So, if you sought to make an investment, you made every effort, 

but you were kept out of the market because of discriminatory 

treatment on the part of the other government, you might be able 

to bring a claim with respect to that pre-establishment phase. 

But the short answer to your question is, yes, you have to be an 

investor or somebody who is seeking to make an investment, and 

is being blocked in order to go to arbitration. 

Dr. MCDERMOTT. Ms. Lee. 

Ms. LEE. I think that is a very important question, and I would 

disagree that it is obvious on the face of it that only investors 

should have private right of action. 

If you look at the trade agreements, investors have a privilege 

that no other group—not a union, not a non-governmental organization—has, to challenge whether the other party to the agreement 

is living up to its obligations or not. 

We have talked a lot about whether unions, for example, should 

have the right to sue another government if it is not in compliance 

with a labor chapter, and whether we would have the opportunity 

to bypass our own government, so that we wouldn’t have to convince our government to bring that case. Everything but the investment language in the trade agreement is adjudicated on a government-to-government basis. 

I think it creates a huge imbalance in the trade agreements, certainly, if you give one group, private investors, the right to sue. 

Even in the context of the bilateral investment treaties, it creates 

an imbalance between private companies and governments. Governments have an obligation to protect the interests of their citizens. They have a democratic process for determining the level of 

regulation, whether it’s public health or the environment. 

To give an individual company the right to sue and to create a 

tax liability when it is successful is an enormous step, and one that 

I think should be rethought. 

Ms. MENGHETTI. Congressman McDermott. 

Dr. MCDERMOTT. Yes? 


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Ms. MENGHETTI. If I could just make one—two points about 

that, one is an investor should not be thought of as a business. So, 

an organization that goes overseas and opens an office for other 

purposes and invests capital in that country could be an investor. 

And the other point I would make is it is very interesting that 

investor-state dispute settlement—we see it under our BITs, now 

our FTAs—we also see it in agreements that—say the World Wildlife Fund, an environmental, non-government organization has 

with foreign governments in tropical timber conservation, where 

there is a debt swap, and the governments make certain commitments. Those international—those environmental organizations 

have sought precisely these rights in those areas, as well. 

And so, it’s not something, I think, just confined to businesses. 

But investors, the reason you have investor-state as opposed to any 

other parts of a broader FTA is the investor is overseas. They are 

subjecting themselves to a foreign government’s activities and actions. No other actor, if you’re not an investor, is put in the same 

place. 

Dr. MCDERMOTT. The reason I asked the question is that I remember—we have been going around and around on this issue for 

some period of time. And the most classic case was—or that I remember—was the gasoline additive produced by a Canadian company that—and which they sued the State of California for their 

law that said they couldn’t have it any more. And they won. 

And are we in that same place? Did they not win? 

Ms. MENGHETTI. The U.S. Government won that case, the 

Methanex case. 

Dr. MCDERMOTT. And the Canadian firm—— 

Ms. MENGHETTI. The Canadian firm lost. And in fact, the Canadian firm had to pay damages to the U.S. Government. 

Dr. MCDERMOTT. And who was it that gave the evidence? Did 

they just defend the right of California to protect the common 

good? 

Ms. MENGHETTI. I believe it was the Department of State’s, 

the Legal Advisor’s Office, which did the defense. 

Mr. POSNER. That’s right. In any of these cases, whether it involves a measure of the U.S. Federal Government, or a state government, or a local government, it is the United States, and in particular the Legal Advisor’s office within the Department of State, 

that defends the measures. 

I could elaborate on that more, but it goes to a point that I think 

Mr. Brady alluded to earlier, which is that when you go to arbitration, the only remedy you can seek is damages, money damages. So 

it is not as if, in the Methanex case, to use that as an example, 

the Canadian investor in that case could have sought to compel 

California to do something that it didn’t want to otherwise do, in 

the interest of regulating on behalf of the consumers of California. 

The most that Methanex could have gotten, if it had won, which 

it did not, was money damages from the U.S. Government. 

Dr. MCDERMOTT. And that same thing, then, could be happening with our bail-out money to banks. If there is some creative 

lawyers in some countries, we may wind up, our $700 billion bailout of our banks—Mr. Stumberg. 


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Ms. MENGHETTI. I think that’s not the case. I mean, in 2004, 

one of the very big innovations put into our model BIT was this 

prudential carve-out—that governments have the right to take 

measures, precisely financial measures, if they need to, for prudential reasons. 

The bail-out that we have seen, the TARP, has not been discriminatory. I don’t see any allegation that it has come close to violating 

anything our government has committed to. 

Mr. STUMBERG. The question about the prudential carve-out 

was raised in Ambassador Kirk’s confirmation hearing. It’s a twosentence exception. The first sentence says nothing in the agreement should stop a government from taking prudential measures. 

The second sentence says that governments may not take advantage of the exception, if to do so would avoid their obligations 

under the agreement. It appears to be self-canceling. Or, perhaps 

it creates a burden of proof in favor of the investor and against the 

government. 

That is the kind of question I am trying to raise to your attention, where I am not arguing that there shouldn’t be investor protections. I am saying that these are very complex agreements. We 

learn as we go. And every time we anticipate a new factual scenario, we should take advantage of it. We should be prudent and 

manage future risk, and do things like tighten the screws on that 

prudential exception. 

If you want a good model for one, go back to NAFTA. NAFTA has 

a one-sentence prudential exception, and it says, ‘‘Governments 

may take prudential measures, and that will not be a violation of 

this agreement.’’ 

There are hundreds of billions of losses, as you know, in the U.S. 

financial markets, and there is a great deal of de facto unintentional picking and choosing going on between institutions. We have 

no idea what the potential upside of our liabilities are, in that respect. 

Chairman LEVIN. Mr. McDermott, I think we will turn it over 

to Mr. Etheridge, and then we can come back. Mr. Etheridge. 

Mr. ETHERIDGE. Mr. Chairman, thank you. And let me thank 

you all for spending the time here this morning. I know it has been 

a long morning, and I appreciate it. 

Mr. Posner, let me ask you a question, since you have—as someone who has worked at the corporate level, as well as having been 

staff level, you have a little bit more of a unique perspective—and 

then I will ask the others to comment. 

And my question is, are there specific changes that you would 

recommend to our FTAs and BITs that would provide legal certainty, and facilitate investment that would help provide economic 

growth to American companies, companies here in the United 

States? 

Mr. POSNER. I think that the short answer is no. I think what 

you have in our current model is a core set of protections that Ambassador Larson alluded to earlier. 

When the U.S. investor goes overseas, sets up shop in the territory of another country, really these are the main protections. This 

is the essence of what it’s looking for in its relationship with that 

other country. It wants to know that it won’t be discriminated 


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against. It wants to know that if its property is taken, that it will 

be compensated promptly, effectively, and adequately. It wants to 

know that it will be entitled to a certain minimum standard of 

treatment. 

So I think those core elements have been there since 1982. They 

continue to be there. What we have done in the intervening 27 

years is to make certain adjustments, I would say, at the margins 

to start to take into account the fact that, as we enter into these 

agreements with bigger economies—with economies that are making investments in the United States, there is a possibility we 

might be sued. And there has been more thought given to how we 

would respond to that. 

So, the short answer to your question, Mr. Etheridge, is no, I 

can’t think of any change that I would make. 

I would, if I can sort of just tack on one sentence in response to 

Professor Stumberg’s point, with respect to the prudential exception for financial services, in fact, it is not a one-sentence exception. 

There is an entire page that sets out a special procedure where financial regulators of the two countries that are Parties get together and work through these issues, the same way they would 

if there were a complaint made with respect to a tax measure. 

So if a country were challenging a tax measure of the United 

States or Peru or Chile, or whatever other country, and said that’s 

expropriatary, there would actually be a dialog that takes place between taxing authorities to sort that issue out before you even ever 

got to a panel. 

It is the same with prudential measures. So it illustrates the 

point, I think, that we have a good balance. I can’t think of anything that I would change, because I think if you did you would 

move in one direction or the other, and that would really disrupt 

the balance and crater the program. 

Mr. ETHERIDGE. Anyone else? 

Mr. STUMBERG. Sure, if I could respond. Hopefully there is always that kind of dialog in investor-state disputes. The procedures 

require the parties to try to get together and work out a pragmatic 

solution first. 

In this case, what the investment chapter requires is that that 

dialog must include the taxing authorities, or the prudential authorities of the country. If they don’t agree, then the case still goes 

forward to an arbitration panel. 

So, Ted is right to point out the fact that there is built-in dialog 

here. But it is part and parcel of the usual process. It is just much 

more explicit. 

Mr. ETHERIDGE. Ms. Lee. 

Ms. LEE. Mr. Etheridge, in answer to your question about 

whether there are any reforms, there is a short list on page five 

of Professor Stumberg’s testimony, that I think is a good summary 

of the areas that you would want to look into. There are some suggestions for how to narrow some of the definitions and the standards, and clarify where the language is unclear, where the language has been interpreted differently by different dispute panels 

over the years. We have put ourselves in a vulnerable position, 

where we are hoping that the dispute panel will decide in a certain 

direction, and that they will take one tack over another. When we 


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have something as important as this issue, which affects both the 

United States, as well as the outward investment and unions and 

our brothers and sisters in developing countries, we should narrow 

the language so it says exactly what we want it to, and we won’t 

have this problem with differing interpretations, or hoping for the 

best out of a dispute panel, because we will have clarified that language. 

Mr. ETHERIDGE. Mr. Larson. 

Mr. LARSON. Very briefly, I tend to the view that these issues 

have been though through very, very carefully. So I don’t want to 

give the impression that what we have now has—is necessarily 

bad. I do think that we have been assigned to have a look and see 

if it can be made better. We need to do that. 

One area that certainly is different today, looks different today 

than it did five years ago, is financial services, and the whole issue 

of safety and soundness. And you can look at it from two perspectives. One is there is more regulation and more attention on what 

governments ought to do to ensure safety and soundness of institutions. That is for sure. There is also a very clear recognition, I 

think, that investment from abroad has been a very important contributor to the ability of our financial system to respond to the crisis that we’ve faced over the last 2 years. 

So, we have work to do. I just don’t have a pre-conceived answer 

to your question. 

Ms. MENGHETTI. If I might, I tend to agree with my colleague, 

Mr. Posner, that we don’t need to see new improvements. I am 

happy to discuss them, I think they always should be discussed. I 

am quite alarmed, in fact, by the proposals made at the end of Professor Stumberg’s testimony, which I have just been looking at. 

And with the Committee’s permission, I would probably like to submit something for the record on those. 

What I think we really need is more of these treaties. There are 

over 2,000 of these BITs around the world. The United States is 

party to about 40, and about 15—with 15 countries in our FTAs. 

The United Kingdom, Germany, others have very strong BITs, and 

they have them with countries like Korea, with investor-state. Germany and The Netherlands have a BIT with China that has strong 

expropriation standards and investor-states. Our companies, our 

economy, and our workers are losing the competitive battle with 

the lack of more BITs that we don’t have. 

Mr. ETHERIDGE. Thank you, Mr. Chairman. I yield back. 

Chairman LEVIN. Mr. Pomeroy. 

Mr. POMEROY. Mr. Chairman, thank you for this hearing. And 

I apologize for missing so much of it, in light of conflicts that I just 

simply couldn’t avoid. 

The inquiry, I believe, is so extremely important, because this notion that the way we have been doing trade is the way we will do 

trade going forward, bring on the next trade deal, would be a very 

erroneous notion, relative to the feeling across the country, and certainly the feeling in this congress. 

And so, essentially, this kind of inquiry—where are the soft spots 

in the trade deals, how do we make certain that legitimate questions that people have about the wisdom of what we’ve done are 


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being addressed, and how can we make sure we don’t repeat errors 

going forward, all of this is extremely important inquiry. 

Having missed virtually the entire hearing, I am not going to ask 

questions that have probably been covered already. I will continue 

to review the statements and, again, appreciate very much your 

leadership on this panel. And I hope, with the spirit of bipartisan 

accord, we can continue this type of inquiry. I think it is very, very 

important to the institution we represent on trade. Thank you. 

Chairman LEVIN. Well, thank you. Let me just ask—do you 

have a few more minutes? I mean, you have been very patient. Are 

you willing? 

I think the importance of this subject, and also the spirit expressed by Mr. Pomeroy, which I think you know is very much 

mine, makes it, I think, useful if we spend a few more minutes. 

Okay? 

Kevin, Mr. Brady, do you have anything further? 

Mr. BRADY. Sure. Just again, I—Chairman, thanks for holding 

this hearing. I do think it’s important for us to be looking for ways 

to improve issues. 

This provision has proven to be very helpful to our ability to sell 

U.S. products overseas, to sell our services. And it has been, I 

think, critical in attracting investment. Just like a company, you 

would rather be one that people want to invest in than a country 

(sic) you don’t. And this has been critical in attracting investment 

that supports five million U.S. jobs—also critical. 

I want to address a couple of points that have been raised very 

thoughtfully by our Members. One is the concern that in Panama, 

or in any place, that some shell company could locate there, and 

then bring a cause of action against their or U.S. law. 

Up on the screen is the language from the Panama trade promotion agreement that deals with the issue. And, basically, it says 

to the point if the enterprise has no substantial business activities 

in that territory, other than just owning or controlling, that their 

benefits may be denied under this chapter. In other words, the 

shell company, I guess, could file a claim, but not very likely to succeed. 

There has been concerns, perhaps, a foreign company could locate in the U.S., again, use a shell company or otherwise, and challenge our U.S. environmental, state, and local environmental regulations but also—again, because of improvements to the provision 

language in our agreements and investment treaties—say ‘‘except 

in rare circumstances, non-discriminatory regulatory actions by 

party that are designed and applied to protect legitimate public 

welfare objectives, such as public health, safety, and the environment do not constitute indirect expropriations.’’ 

Again, we took efforts and actions to limit the likelihood that 

that would occur. So I think some of these issues have been addressed, and have proven to be good improvements to this provision. 

But I wanted to ask Mr. Posner, I guess, because you raised it 

in testimony. You talked about the balance that, as we provide and 

seek greater protections for our ability to sell American products 

throughout the world. That reciprocity exists, so you have to weigh 


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that balance against the rights that are provided in a reciprocal 

trade agreement. 

Can you talk—since you were so instrumental in 2002 improvements—can you talk a little about that? Because I actually think 

that is an area we don’t spend much time thinking about in this 

provision. 

Mr. POSNER. Sure. Going back to 2001, 2002, you had started 

to see more and more claims against the United States under 

NAFTA. You saw the Methanex claim that Congressman 

McDermott alluded to earlier. There was a claim involving an infrastructure project in Massachusetts. There was the Loewen case, 

the so-called Mississippi funeral homes case. So you had a number 

of cases which caused observers of these agreements to think more 

carefully about what happens when the United States is sued. Are 

we adequately protected? 

In response to that concern, we did a number of things. One is 

with respect to expropriation, and the annex that some people have 

referred to. There was a concern that an investor-state arbitration 

tribunal might interpret the concept of expropriation in a more expansive way than a U.S. court would interpret the concept, the parallel concept, of takings. 

To ensure that that did not happen—as Ms. Menghetti referred 

to—we created this annex. And in drafting that annex, what we did 

was we went back to the seminal Supreme Court cases in the area 

of regulatory takings, the famous Penn Central case which many 

are familiar with—— 

Mr. BRADY. Yes. 

Mr. POSNER [continuing]. We looked at the factors that the U.S. 

Supreme Court and lower courts looked to in determining whether 

a regulatory action constitutes a taking. We drew on those principles, and put them into the annex. So I think that was one very 

important thing that we did. 

We also were mindful of the fact that, in a sense, there is a connection between the risk of being sued and transparency. We 

thought if the process is more transparent, stakeholders will become familiar and more comfortable with it. They won’t see this as 

some star chamber that is deciding things in an untoward way. We 

insisted upon transparency. That has now become a cornerstone of 

our investor-state processes. 

There was also a question back in 2001 about the meaning of the 

so-called minimum standard of treatment. In particular, there was 

a concern that an arbitration panel would take a concept like fair 

and equitable treatment, and say, ‘‘Well, that is an entirely subjective concept, a standardless concept. I can decide—I, as arbitrator—can decide what it means.’’ 

There is a concept in the world of international arbitration that 

goes by the Latin term ex aequo et bono, that an arbitrator can decide based on what it thinks is fair. And there was a concern that 

panels would take that provision in U.S. treaties and interpret it 

in that way. 

So, we closed that door by saying, ‘‘No, you interpret that concept 

in accordance with the customary international law of minimum 

standard of treatment.’’ And there is a very well-developed law, 

over a century old, on what that concept means. 


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Those were the main features that we put in there in recognition 

of precisely the concerns that you have identified. Thank you. 

Chairman LEVIN. Okay. I think—— 

Mr. BRADY. And, Chairman, the only point in asking that last 

question was that I think it is important to keep improving our 

agreements at every shot, but also it’s important not to sort of fall 

to the temptation that everything before us is bad. There have been 

good improvements in this provision that we ought to embrace as 

we work forward. Thank you. 

Chairman LEVIN. Okay. And then, as I turn to colleagues, language that we know regarding shell is there. 

I think an issue has been raised here—and perhaps the subcommittee will consider this—where the entity in another country 

is not a shell. And this is going to occur more and more during 

globalization, right, where you have a subsidiary that isn’t a shell, 

but a real thing. And I think the question becomes does that subsidiary—which, let’s assume is a true subsidiary, it doesn’t call all 

the shots, you know, et cetera, et cetera—would it have access to 

an arbitration panel which would not be true otherwise, of its home 

corporation? 

That is a different issue, is it not, than—Ted, Mr. Posner, do you 

want to—— 

Mr. POSNER. Yes. I will just say briefly, first of all, the denial 

of benefits article, which Congressman Brady has distributed and 

put up on the screen, that’s one half of the picture. So you can’t— 

a mere shell could not bring a case against the United States. We 

all agree on that. 

Your question, Mr. Chairman—if it had substantial business activity in the other country, could it bring a claim? And the answer 

is, yes, if it’s bringing a claim with respect to an investment that 

it has made in the United States. 

So, if you had a situation—take a big U.S. corporation that establishes a small subsidiary in Panama or some other country. The 

mere fact of its having substantial business activity in the territory 

of that other country is not enough for it to bring just any claim 

against the United States. It would have to bring a claim with respect to an investment that it owns in the United States, that it, 

the foreign subsidiary owns. That’s a pretty high bar. 

The prospect of a company arranging its business dealings on the 

possibility that one day it might want to bring a claim against the 

United States with respect to an investment that the subsidiary 

owns in the United States I find rather implausible. 

Chairman LEVIN. Yes, Professor Stumberg, and then I will turn 

to my colleagues. Yes? 

Mr. STUMBERG. Well, Ted—— 

Chairman LEVIN. By the way, this is why we are having this 

hearing, to raise these issues and have the responses. Professor, 

take a minute, and then I will turn it to one of my colleagues. 

Mr. STUMBERG. Well, to my colleague, Mr. Posner, I would say 

the law school I went to taught me that one of the lawyer’s chief 

roles is to help one’s corporate clients structure their operations, to 

create an architecture that takes advantage of a complex array of 

legal features: tax law, corporate law, environmental and economic 

regulation. 


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The State of Delaware is a living monument in the United States 

to the legal imagination, and how frequently lawyers do, in fact, 

help their clients structure the architecture of which subsidiary is 

incorporated where, to take advantage of legal opportunities. 

Ms. MENGHETTI. One—— 

Chairman LEVIN. At this point—is there an example, I guess? 

Ms. MENGHETTI. Could I—— 

Chairman LEVIN. Yes? 

Ms. MENGHETTI. I was going to suggest the example is this. 

We have an over 20-year-old bilateral investment treaty with Panama. We have never seen this case. We have never seen that type 

of structuring that Ms. Posner described would have to happen to 

come within the treaty—— 

Chairman LEVIN. How about other places than Panama? Has 

that happened? 

Ms. MENGHETTI. Not against the United States, it hasn’t. And 

that is probably, in significant part, because the United States has 

such a good legal system. 

Chairman LEVIN. All right, Mr. Doggett, you are next. 

Mr. DOGGETT. Thank you very much, Mr. Chairman. Ambassador Larson, the Joint Committee you have seems to me to be a 

constructive step forward in trying to address some of the concerns 

that I have, even though we may have a somewhat different perspective about how far-reaching those are. 

Do you have a feeling at this point as to when you will have any 

kind of report that a Committee might benefit from? 

Mr. LARSON. Not as specific, Congressman, as I would like to 

be able to give you today. Ms. Lee and I had a conversation in the 

last couple of days with representatives of the government, USTR 

and the State Department. We—I think we have collectively agreed 

that she and I and the government need to sit down and map out 

the next steps. We want to hear those issues that the executive 

branch thinks are very high on their list. We have heard a lot out 

of the conversation today, and I would like to thank the chairman 

for the opportunity to, you know, get this input to our work. 

One of the things we have to talk about is time table. I know 

that there is a hope that this could be expeditious, but we also 

know that these are thorny issues, and—— 

Mr. DOGGETT. And I suppose it doesn’t have to be all at once. 

You may resolve some issues without resolving all issues. 

And so, hearing from you, I would just say it would be constructive—the kind of conversation from the differing perspectives that 

you and Ms. Lee have in addressing these issues is very much the 

kind of conversation that I think the chairman is facilitating in this 

committee for the first time, not just the first time today, but trying to get a discussion of what a more modern trade policy would 

look like. 

And I would ask you, Ms. Lee, as you do that, to look at this 

issue of when it’s appropriate, as a preliminary matter, to have an 

investor tribunal of this type. It is appropriate, in some circumstances. Despite the questions that I have about it, I would 

hate to be investing in some countries if I had to rely just on their 

local courts. 


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But I think that USTR in the past, under Democratic and Republican Administrations, has had a tendency to just listen to whoever 

might have a business claim there, the fraternity of trade lawyers, 

and not consider the broader issues. And I think we need to look 

at the forum non conveniens law, and at other considerations, to 

determine what is appropriate. 

Ms. Menghetti, I hope you will give a full critique of what Professor Stumberg is talking about, because I can see issues with 

some of these, and some of them are somewhat appealing to me, 

as ways to try to address this. 

And I want to ask you, Professor Stumberg, about one of those. 

I know there was a time in this country—in fact, it concerned 

President Roosevelt a great deal—that, you know, it was viewed as 

a taking of a company’s profits if you had a child labor law, or if 

you set minimum standards for how many hours a week someone 

had to work. No one is suggesting that we’re going back to those 

kind of conditions on those issues, but the decisions of the courts 

of the 1930s and the 1920s, and substantive due process are very 

different, though there are, certainly, jurists in recent times who 

have urged that point of view. 

What does it mean to say that you believe we should follow the 

position of the U.S. brief in Glamis, with reference to minimum 

standard? 

Mr. STUMBERG. Well, it’s about due process. There are two flavors of due process, going back to the Supreme Court cases before 

1934. One flavor, which is alive and robust today, is procedural due 

process, the basic ideas of fairness in courts and agencies. 

The now obsolete notion in terms of U.S. Constitutional law is 

called substantive due process, by which the courts put themselves 

in a position to second-guess and overturn legislation. The Lochner 

case you referred to was about workers’ hours. 

It is substantive due process that was the mechanism used by 

the arbitrators in the financial services case, the Saluka case, 

which came down 2 years ago out of the Czech Republic. That’s 

why I am concerned that the DNA of substantive due process is 

alive, and arbitrators are using it to second-guess the policy determinations of National Governments in terms of how to manage 

their bail-out strategies, and which economic emergency measures 

are appropriate. 

Mr. DOGGETT. Thank you. And I hope you will flesh out your 

specific proposals, just as Ms. Menghetti would give the critique of 

it. 

And I would just say, in closing, Mr. Chairman, thank you for— 

again, for doing this. I think when the congress approves an investor-state tribunal, we are making a decision that our open federal 

justice system is not the appropriate forum, that we need to move 

to an unelected tribunal to do it. It has great potential consequences for the taxpayer, who might ultimately be called on to 

fund one of these judgements, and it has great potential for harm 

to the ability of our governments to enact reasonable environmental, health, and safety laws. 

That has to be considered in balancing it against the need to protect our investors at home and abroad. And I think today’s hearing 


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takes us a step forward in trying to reach a reasonable balance. 

Thank you very much. 

Chairman LEVIN. And, of course, one dilemma we face is if we 

insist on a tribunal in terms of actions of another country, can we 

insist that they use our courts? And we have thrashed—we have 

talked about these kinds of issues, and we did, in terms of worker 

rights provisions, if I might say so, where we insisted that there 

be parity. 

And so, you raise an important issue, but I think we need to look 

at it—I know you agree—kind of in a well-rounded way. 

Well, are we done? Yes, Mr. McDermott. 

Dr. MCDERMOTT. Mr. Chairman, I know you all see those cameras up there on the wall behind us. And for those people who are 

watching this, it looks like a pretty arcane subject. And I am not 

a lawyer, and I am not a banker, and I am not involved in international trade. But what I am interested in is that Members of 

Congress have the opportunity to establish good public policy, and 

then not have it taken away by some trade agreement or arbitrary 

group of tribunals some place. 

So, Mr. Stumberg, I would like at least your observation as to 

what you think is the most protective of the public common good 

that we could do in these laws to change, alter—I understand 

money is important. I mean, God knows, we cannot do without 

money, right? But money does not necessarily, in my view, trump 

the common good. 

So, I want a system of trade agreements that does not trump the 

common good, whether it is in Honduras or the United States. And 

I would like to hear from you what you think we ought to do with 

this issue. 

Mr. STUMBERG. Let me limit my answer to the two most important investor protections. Recall earlier what you were talking 

about America’s defense team and the offense team. The defense 

team is a crack squad of lawyers at the U.S. State Department, 

and they successfully defended the California measures in the 

Methanex case, which we should all celebrate. 

My radical proposal, Linda, for improving the—— 

Dr. MCDERMOTT. Let me just stop you right there. One thing 

on that bunch, on the defense side. 

Mr. STUMBERG. Yes? 

Dr. MCDERMOTT. Have there been things done in the last Administration to weaken that division of the State Department, and 

their ability to protect the common good? 

Mr. STUMBERG. Not to my knowledge. 

Dr. MCDERMOTT. No? 

Mr. STUMBERG. They are healthy and thriving. 

Dr. MCDERMOTT. Okay. 

Mr. STUMBERG. They won the Methanex case, and they got the 

arbitrators to adopt the following one-sentence conclusion about the 

scope of expropriation. May I read it to you? I am proposing this 

as yet a further improvement. 

‘‘As a matter of general international law, a non-discriminatory regulation for 

a public purpose, which is enacted in accordance with due process, and which affects the foreign investor, is not deemed an expropriation.’’ That is more protective 

of the public interest than even the crafted language that Mr. Posner was talking 


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about before. I would submit that idea as the best the State Department’s lawyers 

have accomplished: it is the high water mark of clarity in an arbitral decision. 

And then, with respect to the other investment protection, the 

minimum standard of treatment, the so-called substantive due 

process issue, the brief of the State Department’s lawyers in the 

Glamis case is a masterpiece. 

Unfortunately, it is a long masterpiece. But if you look at page 

221, you will see that—— 

Chairman LEVIN. It is long. 

Mr. STUMBERG. You will see that definition—— 

Dr. MCDERMOTT. I will have my staff write down, ‘‘221.’’ 

Mr. STUMBERG. And I will leave it for you. The customary 

international law treatment of aliens, which the State Department 

lawyers have, in scholarly fashion, illuminated in a way that is a 

logical, tight and unambiguous definition. It is tighter, more clear, 

and less risky than even the improved language in the draft Panama and Korea—free trade agreements. 

So, I would submit page 221 of the brief of the State Department 

is the United States Government’s lawyers’ best guidance on how 

to clarify this investor protection. 

Dr. MCDERMOTT. Okay, anyone else want to make a quick 

comment? You have got a minute. Ms. Lee. 

Ms. LEE. I just wanted to make a quick comment about the 

broad issue here. I certainly understand, from the point of view of 

American companies, that they want the strongest possible protections when they go overseas. I sympathize with that. 

But I also think it is important that we clarify that the interests 

of the United States are not entirely synonymous with the interests 

of U.S. multi-national corporations. Particularly when I talk about 

my members, working people, the outward foreign direct investment in many cases—not every case, but many cases—is about taking our jobs and moving them to another country, and then seeking 

the kinds of protections in that country that they would have had 

if they had stayed home in the United States of America. 

So, it is not an irrelevant issue, it’s not an arcane issue for our 

members. This is the intersection of trade and investment. It is all 

about globalization and outsourcing and offshoring and who is taking care of workers and communities and the environment back 

home. 

And we care also, as you do, I know, about whether this is good 

governance for developing countries, whether they are giving up too 

many rights because the corporations in the United States are so 

powerful and have the best lawyers and good teams, and they can 

afford—they have deep pockets. U.S.-based multinational corporations can bring these cases to challenge domestic laws in other 

countries. For example, in Mexico, Metalclad challenged the Mexican government’s decision not to grant the permits to have a toxic 

waste disposal in a place where they thought it wasn’t environmentally appropriate. 

The issues are tremendously important. The competitiveness of 

U.S. companies is not the same as the profitability of U.S. companies operating abroad. We would define competitiveness as the 

ability of U.S. companies who are operating on American soil to 

survive and thrive in a global economy. 


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We just need to remind ourselves what the ultimate goal is of 

our trade and investment policy—that it’s not to have more trade 

and investment for the sake of that, it is to make sure that trade 

and investment is serving the social goals. Thank you. 

Dr. MCDERMOTT. I yield back the balance of my time. 

Chairman LEVIN. Mr. Herger. 

Mr. HERGER. Thank you, Mr. Chairman. Ms. Menghetti, we frequently hear the allegation that U.S. companies that have investments abroad have somehow turned their back on the United 

States in search of low-cost labor and other weak regulatory standards. I am pleased that some of my colleagues have joined me 

today in pushing back on that notion. 

The facts simply tell a different story. Foreign operations complement U.S. operations. One particular fact that caught my eye is 

that the overwhelming majority of existing outbound U.S. foreign 

direct investment goes to developed country markets, like Europe 

and Canada, that have strong labor protections. Right now, only 1 

percent of U.S. foreign investment goes to China, for example. 

Ms. Menghetti, how does the fact that most U.S. investment is 

in high-wage countries reconcile with the perception some people 

have that this investment is simply offshoring American jobs to 

low-wage countries in search of increased profits? 

Ms. MENGHETTI. I think it absolutely contradicts that type of 

allegation about outsourcing. As you indicated, most U.S. investment abroad is in high-wage countries. When companies go overseas to invest, they do so for many, many reasons. They do so, in 

primary part, to be able to access the 95 percent of the consumers 

outside the United States, and those with the greatest purchasing 

power. And those are in the highest wage countries. 

I believe Congressman Brady said at the outset the very striking 

statistic that the output of U.S. subsidiaries overseas, the vast majority of it, over three-quarters of it—stays outside the United 

States. Or, actually, it’s much higher than that, it’s 95 percent of 

the U.S. output of U.S. subsidiaries overseas stays overseas. About 

five to 7 percent comes back to the United States. This isn’t about 

outsourcing. This is about making the U.S. economy, U.S. industries, and our U.S. workers stronger. 

I have companies who tell me that one dollar out of every four 

that they pay their U.S. employees is because of their overseas operations. Overall, for U.S. companies that are globally engaged, 

about half of all their income comes from their operations overseas. 

Foreign investment strengthens U.S. companies. It strengthens 

the U.S. economy, and provides very good-paying jobs for U.S. 

workers, and strengthens the ability of companies to have those 

workers here in the United States. 

Mr. HERGER. Thank you. And, Ms. Menghetti, in your testimony you talked about how important it is for the U.S. service sector to be able to establish foreign operations to serve customers in 

those markets. That statement seems to reconcile with data I have 

seen from the Commerce Department that shows that virtually all 

the growth in the employment of U.S. companies’ foreign operation 

has been in sectors other than manufacturing. Would you agree 

with that conclusion? 


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Ms. MENGHETTI. I absolutely would, Congressman. For U.S. 

service suppliers, the vast majority of their sales have to be sales 

from their overseas subsidiaries to the local market. There is 

some—cross-border services sales, but most of it is affiliate operations. 

You can’t provide banking services, you can’t provide other services sitting here, in the United States, for the most part. And that 

is exactly why the United States service sector, one of our most vibrant sectors, has really been able to benefit from overseas investment. And that helps us back here, in the United States, because 

a lot of the basic documents that those service providers use in 

their overseas markets—policies, manuals, and other research and 

development—that still stays back here, in the United States, and 

grows the U.S. companies back here, home, as well. 

Mr. HERGER. Thank you very much for your testimony. This is 

very important. It is so easy to get caught up on the thought that 

these issues are hurting our economy when, in essence, we need to 

be encouraging this type of effort and investment, because it ultimately helps us and helps our workers, and helps the U.S. economy. 

So, thank you very much. And, Mr. Chairman, I yield back. 

Chairman LEVIN. Okay. I will resist the temptation to comment 

on that. Because my plea is that we try to look at various sides of 

an issue. Mr. Herger, when you say, ‘‘ultimately, it benefits,’’ it 

doesn’t always. 

And this isn’t a hearing on manufacturing, but if it were I think 

I could give you some very prime examples of where it is more complicated than that. And we are going to be in the manufacturing 

area in the next days, discussing the very issue of the interaction 

of globalization and how it works out for people who work here. 

And so, indeed, I think the thrust of this hearing is to—and it 

has been, I think, extremely, very useful—is to try to take a fresh 

and a well-rounded view of these issues. And, Ms. Lee and Ambassador Larson, you are now charged to carry that on. And we wanted to have this hearing, in part, so we could provide input, and in 

part because we want there to be a lot of interaction in the days 

ahead. 

So, Ms. Menghetti, you are going to send us some further material. I think, Professor Stumberg, you have been asked by Mr. 

Doggett to send some further material. And the others of you, if 

you would like to do that, do so, I think in the case of the ambassador and Ms. Lee, you probably will refrain from that as you undertake your responsibilities. And we are hopeful that, as you say, 

you will proceed expeditiously. 

Well, I want to thank my colleague, the Ranking Member, and 

my colleagues on all sides. This, I think, has set an example of the 

kind of approach of hearing we are going to have as we craft a comprehensive new trade policy for the United States of America. 

Thank you very much. We are now adjourned. 

[Whereupon, at 1:07 p.m., the Subcommittee was adjourned.] 

[Submissions for the Record follow:] 


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Statement of Chevron Corporation 

Pursuant to the notice for the May 14, 2009 Subcommittee Hearing on Investment 

Protections in U.S. Trade and Investment Agreements, Chevron is pleased to submit 

these comments for the record. The issue of international investment protection is 

critically important to Chevron. We are a leading international oil company with 

major operations in the world’s most important oil and gas regions. We have extensive international investments in refining, fuels and lubricants. Other interests 

range from chemical production and mining to energy research and nanoscience. We 

also operate power facilities and are the world’s largest producer of geothermal energy. We urge the Committee to support a strong program to expand investment 

protection agreements and resist weakening the high quality standards reflected in 

the 2004 Model Bilateral Investment Treaty (BIT), which risks further narrowing 

of the provisions vital to protect U.S. interests abroad. 

Investment protection is an issue with real-world implications—a substantial portion of Chevron’s overseas investments are made in countries without high-quality 

investment protection agreements with the United States, even as many of these 

countries pursue investment agreements with other trading partners. Sustained 

progress toward a comprehensive global investment protection regime is necessary 

to both reduce the risk associated with overseas investments and to ensure that 

U.S. companies are not disadvantaged against foreign competitors whose investments are protected by such agreements. High-quality investment protection agreements, along with measures to promote good governance and the rule of law, are 

indispensible to provide a level playing field for U.S. companies operating abroad 

and to ensure that we have the tools available should we be subject to expropriation 

or nationalization of our assets. 

High-quality investment rules are crucial to maximizing global economic growth, 

and investment protection has particular relevance for energy investments. The 

International Energy Agency estimates that around $26 trillion in new investments 

will be needed to meet rising global demand for energy between 2007 and 2030. 

These investments will not only underpin global economic growth, but they also represent important investment opportunities for U.S. companies and the countries 

where we undertake the investment. 

In addition to providing important energy supplies, these investments can represent excellent opportunities for engagement and delivering long-term socioeconomic benefits. Chevron’s approach is anchored in partnerships with governments, communities, local and international nongovernmental organizations, and 

development agencies. We have built a number of partnerships on trust, transparency, mutual learning and a common purpose to promote human progress and 

economic development. We address social issues by working together and delivering 

results ‘‘on the ground.’’ Our community engagement programs enhance our ability 

to conduct business in many parts of the world. In 2008, we invested $160 million 

in our community engagement initiatives. Most was invested in our three primary 

focus areas—improving access to basic human needs, enabling education and training opportunities, and promoting sustainable livelihoods. 

Energy projects require substantial capital commitments and tend to be very long 

term. Free trade agreements with strong investment chapters and bilateral investment treaties reduce the risks associated with these projects and ensure benefits for 

both U.S. energy supplies and consumers at home and abroad. These agreements 

also benefit the FTA or BIT partner, making them more attractive for foreign investment and foreign capital. 

The United States plays an important role promoting a global investment 

protection regime 

Chevron believes that the U.S. government’s trade and investment agenda should 

continue to include a long-term commitment to improved investment disciplines and 

progress toward investment agreements with critical energy suppliers and consumers, including countries like Angola, Brazil, Cambodia, China, India, Indonesia, 

Iraq, Kuwait, Malaysia, Nigeria, Russia, Saudi Arabia, South Africa, Korea, Thailand, Venezuela, and Vietnam. The U.S. can retain a leadership role by ratifying 

pending trade agreements which contain quality investment chapters and by continuing to pursue active BIT negotiations with China and willing countries that 

demonstrate a commitment to economic openness and reform. 

Chevron believes that investment disciplines in the FTA Investment Chapters and Model BIT Must Be Preserved 

Chevron believes that the U.S. government should work to ensure that future 

agreements continue to reflect the high-quality standards established in the 2004 

Model BIT. These important provisions include: 


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• Fair and equitable treatment of investors (e.g., due process and access to additional rights in accordance with international law). • Full protection and security of investments. • Clear limits on expropriation of investments and prompt, fair compensation 

when expropriation occurs. • Free transfers of capital. • Access to reliable, independent, international third-party dispute resolution 

(e.g. investor-state arbitration). • Coverage of existing investments. 

As noted above, Chevron’s operations have global reach. Our ability to continue 

to do business in foreign jurisdictions and to protect our shareholder investments 

is dependent on strong contractual provisions backed by strong mechanisms for resolving disputes, including international arbitration. Any further restriction to our 

access to international arbitration for our international investments would dramatically shift the risk profile for those investments, and put us at a disadvantage compared to foreign competitors covered by treaties which contain such provisions. 

In our view there is no justification to modify the language of the 2004 Model BIT 

and further narrow its provisions in response to the specific concerns cited in the 

hearing notice. (In fact, these issues were addressed at the direction of Congress in 

the development of the 2004 BIT language; further narrowing would signal an important reverse of a longstanding U.S. commitment to trade and investment). In 

particular, we want to focus on investor-state arbitration and offer a specific example to illustrate the critical importance of international dispute resolution to U.S. 

business. 

The importance of investor-state arbitration provisions 

Chevron operates with high ethical standards and values engagement and partnership, and we rarely expect to arbitrate international disputes. We diligently seek 

to resolve disagreements before they require adjudication and note that the availability of an investor-state arbitration mechanism increases the likelihood that good 

faith negotiations can be successfully concluded. This is an important point that 

cannot be overemphasized. The presence of a treaty enables the investor to pursue 

more meaningful discussions with a host government and settle most disputes on 

an equal basis. Nonetheless, there are circumstances where investor state arbitration is the only way a fair hearing can be obtained and it remains an important 

last resort. 

Chevron operates in countries whose laws do not provide adequate safeguards and 

protections for our investment, and lack the institutional capacity and resources to 

administer the rule of law in an effective and transparent manner. A very real example of this situation exists in Ecuador, where Chevron is involved in a long-standing dispute about who is responsible for acknowledged environmental impact in part 

of Ecuador’s Amazon region. 

Texaco Petroleum (TexPet, a subsidiary of Texaco Inc. which merged with Chevron in 2001) was a partner with the Ecuadorian state oil company in a consortium 

that shared on an equity basis all revenues, costs, and liabilities derived from the 

consortium operation of an oil concession. Although opportunities for environmental 

remediation were identified as the Concession Agreement expired in 1992, the state 

oil company (Petroecuador) refused to participate with its equity share of the remediation costs. In 1995, a Settlement Agreement was signed by the Republic of Ecuador, Petroecuador and Texpet, by which Texpet agreed to conduct remediation in accordance with a scope of work proportional to TexPet’s equity share in the former 

consortium, at its sole cost and under close government and partner supervision and 

approval. Upon execution of the 1995 Settlement Agreement, the Republic of Ecuador and Petroecuador released TexPet of any further environmental liabilities with 

regard to all sites not included in the scope of work for which TexPet was responsible, and Petroecuador, as the sole owner and operator of the former consortium 

fields, assumed the responsibility for the remaining remediation required in the 

areas excluded from the TexPet scope of work. In 1998, after a site by site certification and approval process by inspectors representing four agencies of the Government of Ecuador, the Republic of Ecuador and Petroecuador granted TexPet and its 

affiliated companies a full and complete release from any further environmental liability arising out of the former consortium operations. 

After the partnership ended, Petroecuador continued to operate the former consortium fields by itself for years with a well-documented record of oil spills and other 

serious environmental mismanagement. In 2003, private plaintiffs filed a lawsuit in 

Ecuador against Chevron alone—not Petroecuador—for environmental remediation 

of the entire former concession area, seeking the retroactive application of a law enacted in 1999. As part of the evidence production in the process, the parties have 


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requested the court to conduct judicial inspections at a number of sites. The first 

and only judicial inspection completed, with a report issued by five independently 

court appointed settling experts, confirmed that the remediation work conducted by 

TexPet at that site met all parameters of compliance mandated by the Government, 

and that the remediated areas pose no significant risk to the health of human 

beings at that site. 

After this setback, the plaintiffs then began a successful campaign of political 

pressure which has resulted in unfair treatment and a denial of due process to 

Chevron. Unfortunately, Petroecuador did not fulfill its obligations to clean up the 

sites and has also been operating for almost nineteen years without sufficient attention to the type of environmental safeguards common under international practices. 

Furthermore, there have been a number of developments in the proceedings against 

Chevron since 2007 that have compromised Chevron’s ability to get a fair judicial 

hearing, including presidential interference, unethical conduct by plaintiff’s attorneys and a judicial process that has failed to respect the law. 

A U.S. State Department report issued earlier this year concluded that ‘‘systematic weakness and susceptibility to political or economic pressure in the rule of law’’ 

and ‘‘corruption and denial of due process’’ are common in Ecuador, and noted in 

particular that disputes with U.S. companies have become politicized. Transparency 

International consistently ranks Ecuador near the bottom among countries it surveys in the region. Ecuador ranked 151 out of 180 countries surveyed for Transparency International’s Corruption Perceptions Index 2008 and received a score of 

2 out of 10 (10 highly clean, 0-highly corrupt). In recent years, and especially since 

the election of President Rafael Correa, Chevron has experienced increasing unfairness and denial of justice in the case. Multiple international observers have concluded that Ecuador’s judiciary today is dominated by the executive and legislative 

branches, and ample evidence supports that proposition. President Correa has 

pledged his full support to the plaintiffs and their supporters. His government has 

repeatedly proclaimed Texaco and Chevron guilty, and his administration’s open 

support for the plaintiffs and intervention in the legal proceedings show a corrupt 

and ongoing joint effort to impugn the reputation of Chevron and its employees, to 

try to shift Petroecuador’s liabilities to Chevron. 

This example illustrates the importance of investor-state arbitration provisions 

which exist in the current U.S.—Ecuador Bilateral Investment Treaty. Even though 

TexPet fulfilled all of its responsibilities in accordance with the executed agreements, it and its affiliates have been victims of a denial of justice and lack of due 

process in the Ecuadorian courts. Only when we obtain a full and fair hearing in 

a legitimate court or international tribunal will the facts in this case be considered 

on an impartial basis, and only then will Chevron and its affiliate receive fair and 

impartial justice. Without investor-state arbitration in this case, we would be facing 

a massive and fraudulent verdict against us with no means of redress. 

Moving forward 

As the Committee reviews this important issue and the Administration reviews 

the 2004 Model BIT, we urge that any changes to the BIT seek to improve the protection afforded to U.S. investors and bring benefit to the U.S. economy, energy security, companies and workers alike. Narrowing protections and restricting access 

to investor state-arbitration will disproportionately impact U.S. companies abroad, 

and set a precedent that will move us farther from the goal of achieving a strong 

global international investment protection regime. U.S. leadership is imperative to 

ensure that U.S. companies can compete on a level international playing field. 

Chevron appreciates this opportunity to provide input to the Subcommittee and 

would welcome further dialogue. 

f 

Statement of the Coalition of Service Industries 

The Coalition of Service Industries (CSI) appreciates the opportunity to submit a 

statement for the record on investor protections in U.S. trade and investment agreements. CSI is the leading business association dedicated to reducing barriers to U.S. 

services exports and investment and mobilizing support for policies that enhance the 

global competitiveness of U.S. service providers. 

The importance of services in the U.S. economy has been increasing for decades. 

Services comprise 78% of U.S. private sector GDP and 80% of private sector employment. U.S. services companies are the world’s most innovative and competitive, but 

with 95% of the world’s consumers living outside the United States, these companies 

must increasingly look overseas if they are continue to grow and create American 

jobs. 


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1Slaughter, Matthew. ‘‘How Multinational Companies Strengthen the U.S. Economy.’’ Published by the Business Roundtable and United States Council Foundation, Spring 2009. 2 Bureau of Economic Analysis, Survey of Current Business, October 2008. Data cited are the 

latest available. 3 Economic Report of the President, February 2007, p. 168. 

4 Ibid., p. 184. 

5 Ibid, pps. 185–6. 

6 Bureau of Economic Analysis, Interactive Data Tables. 

Why Invest Abroad 

New customers abroad can expand U.S. companies’ revenues and profitability 

much more than can the U.S. market alone. Despite the large size of our economy, 

the past generation has seen slower growth in the U.S. compared with much of the 

rest of the world. From 1990–2008, U.S. GDP grew at an average below that of the 

rest of the world, and significantly below that of emerging and developing economies 

as a whole.1

Direct investment is one of the principal ways by which U.S. services companies 

compete in the global marketplace. Sales of services through direct investments in 

foreign markets account for the largest share of global trade in services. U.S. sales 

of services through companies’ affiliates in foreign markets are significantly larger 

than crossborder exports of services; such sales totaled $806 billion in 2006, up from 

$413 billion in 2000.2

Investment in foreign markets is an imperative for many U.S. services companies 

for a variety of reasons. In some cases, a physical presence may be a legal requirement in order to supply a service. In many other cases, the inherent nature of the 

service is such that it cannot be supplied crossborder, but must be provided directly 

to clients and customers via an on-the-ground presence in a foreign market. 

SALES OF SERVICES BY U.S. FOREIGN AFFILIATES 

(U.S. $ millions) 

2004 2005 2006 

All Countries 642,840 725,036 806,310 

Canada 65,166 77,651 88,826 

Europe 366,899 412,624 457,921 

Latin America & other Western Hemisphere 63,652 72,414 80,084 

Africa 8,108 10,008 10,469 

Middle East 3,446 4,026 5,478 

Asia & Pacific 135,569 148,313 163,533 

Source: U.S. Bureau of Economic Analysis 

The Benefits of Foreign Investment 

Economic activity abroad by U.S. firms complements domestic activity. U.S. companies’ presence in foreign markets has contributed strongly to productivity growth 

in the United States, and thus to higher living standards.3 According to one study, each dollar of additional foreign capital spending is associated with $3.50 of additional domestic capital spending. Further, U.S. firms’ expansion of employment 

abroad is associated with expanded employment in the United States.4 It is often 

assumed that U.S. companies are ‘‘exporting jobs’’ when they hire workers in foreign 

countries, but the historical data show the opposite: when U.S. companies expand 

their employment abroad, they also generally tend to expand domestically. Viewed 

over the longer term, the data demonstrate that, rather than being substitutes for 

one another, the domestic and foreign operations of U.S. companies have been complementary.5

The United States also benefits tremendously from inward investment by foreign 

companies, and services related foreign investment constitutes the bulk of total foreign investment in the U.S. Such investment supported 3.2 million American jobs 

in 2006, or about 60% of all jobs supported by foreign investment in the United 

States.6 Inward foreign direct investment contributes to productivity growth, provides a source of financing for the current account deficit, and generates high-paying 

jobs for American workers. 

Foreign investors participate in a wide variety of services activities in the United 

States. Among the 50 states, services-related foreign investors are particularly large 

employers in California, New York, Texas, Florida, New Jersey, Pennsylvania, Massachusetts, George, and North Carolina. (See Annex I for more detail). 

In short, both inward and outward foreign direct investment contribute to higher 

levels of productivity and employment in the United States. 


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The need for investor protections 

Foreign investments are by nature long-term commitments, and require high levels of investor confidence. Sufficient investor protections are in turn crucial for investor confidence, and in creating a climate in the host country in which high-quality, long-term investment can be attracted. Predictability, the rule of law, contract 

sanctity, and property rights are all essential. For those reasons, CSI members place 

great importance on bilateral investment treaties, and on the investment chapters 

of our bilateral free trade agreements. 

These agreements provide for market access or the right to establish a commercial 

presence, and they protect U.S. investment abroad while attracting U.S. investment 

and trade to the partner economies. They encourage the adoption of market-oriented 

domestic policies that treat private investment in an open, transparent, and nondiscriminatory manner and encourage services companies to secure a physical presence in a foreign market. 

CSI seeks several characteristics in BITs and in the investment chapters of FTAs. 

— The investor-state arbitration mechanism. This is one of the most crucial elements of a sound investment regime. The investor-state dispute settlement 

mechanism can ensure U.S. investors that their investments are protected 

against arbitrary, discriminatory and unfair government actions. 

— A broad definition of ‘‘investment,’’ which includes portfolio investment, not 

solely cross-border investments with long-term aims. 

— Appropriate protections against direct and indirect expropriation and guarantees of prompt, adequate and effective compensation when it occurs. 

— The ability to transfer all payments related to an investment. 

— Retrospective application of investment protections. That is to say, the protections should apply to pre-existing investments, as has been in the case in our 

earlier bilateral investment treaties. 

— A ban on performance requirements, such as the requirement to export a certain portion of output, or to hire certain numbers of host country nationals. 

— Pre-establishment provisions, under which national treatment is extended to 

investors prior to establishing in a market. 

— Use of a negative list, stating the specific services that will be exempted from 

coverage in the agreement, with all other services open to investment. 

Conclusion 

Employing 80% of the U.S. workforce and accounting for 78% of our GDP, the 

service sector is a driver of U.S. economic growth and jobs. Central to sustaining 

the growth of this dynamic sector is the ability of U.S. companies to expand abroad 

to provide services to customers in fast-growing foreign markets. Investment abroad 

is therefore part and parcel of continued U.S. economic growth, as is investment in 

the United States by foreign service providers. The confidence and predictability 

that are afforded by strong investor protections help make such investments viable, 

with important economic benefits for both the investor and the host country alike. 

ANNEX I: U.S. EMPLOYMENT SUPPORTED BY FOREIGN INVESTMENT 

Employment Supported by Foreign Investment 

By State and Industry Sector, 2006 

(thousands of employees) 

Total Manufacturing Services & other 

Alabama 73 .6 45 .6 28 

Alaska 12 .2 2 .7 9 .7 

Arizona 71 .1 20 51 .2 

Arkansas 33 .7 23 .6 10 .1 

California 572 .5 187 .2 385 .2 

Colorado 75 .9 24 .5 51 .4 

Connecticut 104 .9 38 66 .9 

Delaware 25 .2 11 .2 14 .1 

District of Columbia 17 .3 3 .2 14 .1 

Florida 248 66 .8 181 .2 

Georgia 173 .6 62 .9 110 .8 

Hawaii 28 .5 2 .9 25 .6 

Idaho 13 4 .3 2 .7 

Illinois 243 .1 90 .1 153 

Indiana 148 95 .9 52 .1 


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1Professor of International Relations, Boston University, Senior Researcher, Global Development and Environment Institute, Tufts University. This testimony presents the views of the author only and not those of either university. 

ANNEX I: U.S. EMPLOYMENT SUPPORTED BY FOREIGN INVESTMENT— 

Continued 

Employment Supported by Foreign Investment 

By State and Industry Sector, 2006 

(thousands of employees) 

Total Manufacturing Services & other 

Iowa 40 .2 21 .5 9 .3 

Kansas 46 .5 26 .1 20 .4 

Kentucky 91 47 44 

Louisiana 49 .7 16 .3 33 .4 

Maine 24 .4 7 .9 3 

Maryland 104 .1 26 .6 77 .5 

Massachusetts 173 49 124 

Michigan 195 .5 119 .6 75 .9 

Minnesota 86 .5 28 .4 58 .1 

Mississippi 25 .7 10 .4 15 .4 

Missouri 85 .7 47 .1 15 .1 

Montana 6 .8 1 .8 5 

Nebraska 18 .7 10 .7 3 .6 

Nevada 35 .9 9 .1 9 .3 

New Hampshire 37 .1 20 .2 16 .9 

New Jersey 230 .5 79 .5 150 .9 

New Mexico 14 .2 2 .4 11 .9 

New York 389 .3 69 .7 319 .8 

North Carolina 209 .4 98 .6 110 .8 

North Dakota 8 .3 3 .9 1 

Ohio 213 .3 114 .7 98 .6 

Oklahoma 35 .9 * 6 

Oregon 44 15 .7 28 .4 

Pennsylvania 249 112 .4 136 .6 

Rhode Island 19 .5 4 15 .5 

South Carolina 114 .3 62 52 .3 

South Dakota 6 .7 3 .6 3 .2 

Tennessee 140 .3 72 .4 67 .8 

Texas 368 .2 130 .2 238 

Utah 34 .6 10 .6 23 .9 

Vermont 9 .8 3 1 .1 

Virginia 150 .8 44 .1 106 .6 

Washington 88 .2 27 .7 60 .5 

West Virginia 19 .9 10 .1 9 .9 

Wisconsin 87 .2 44 .6 42 .6 

Wyoming 8 2 .1 5 .8 

TOTALS 5,331 2,032 3,158 

* data suppressed to maintain confidentiality. 

Note: totals may not match the sum of the 50 states due to suppression of some data to maintain confidentiality 

Source: Bureau of Economic Analysis, Interactive Data Tables. 

f 

Statement of Kevin P. Gallagher 1

Mr. Chairman, Members of the Subcommittee, thank you for the opportunity to 

speak to you today about this critical issue on behalf of the Working Group on Development and the Environment In the Americas, a group of economists that I cochair from across the Western Hemisphere that has been studying the economic impacts of foreign investment liberalization under U.S. investment and trade agreements in our respective countries. 

We particularly applaud you for expressing concern about the extent to which ‘‘the 

FTAs and BITs give governments the ‘‘regulatory and policy space’’ needed to proVerDate Nov 24 2008 01:06 Jan 27, 2010 Jkt 053473 PO 00000 Frm 00093 Fmt 6633 Sfmt 6621 E:\HR\OC\53473.XXX GPO1 PsN: 53473

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2The policy report, titled Foreign Investment and Sustainable Development: Lessons from the 

America can be downloaded at: http://ase.tufts.edu/gdae/WorkingGroup_FDI.htm. The book and 

full-length studies, Rethinking Foreign Investment for Sustainable Development: Lessons from 

Latin America, is available at: http://www.amazon.com/Rethinking-Foreign-Investment-Sustainable-Development/dp/1843313162. 

tect the environment and the public welfare.’’ It is to these concerns that we address 

this testimony. 

As I mentioned, we conducted a comprehensive review of the impacts of foreign 

investment liberalization in Latin America and show how foreign investment liberalization through Bi-lateral Investment Treaties (BITS) and Preferential Trade 

Agreements (PTAs) has fallen far short of stimulating broad-based economic growth 

and environmental protection in the region. Given this finding, in a report for policy-makers and in a peer-reviewed book we recommend that the ‘‘policy space’’ for 

policies that enable foreign investment to stimulate growth and sustainable development should be accommodated in future BITS, PTAs and in the global trade regime.2

Our research, outlined below, suggests a number of specific measures that should 

be honored in terms of policy space for development-oriented policies in U.S. BITS 

and FTAS: 

• The right to exercise pre-establishment screening of firms wishing to enter a 

market, including but not limited to an environmental impact assessment of 

the investors. 

• The right to deploy capital controls and other counter-cyclical policies to prevent and recover from economic crises. 

• The right to deploy selective performance requirements such as, but not limited to, joint venture requirements, environmental technology requirements, 

and other instruments that will encourage broad-based growth in the host 

country. 

• The right, post establishment, for host nations to seek and publicize information from a potential investor, including environmental, labor, and social information. 

• Our research also suggests that host nations should also deploy their own national innovation, competitiveness, employment, labor rights, and environmental regulations. And most importantly that upon entering an agreement 

with the United States that these issues become part of an institutionalized 

and longer run agenda for reform and harmonization. 

• Finally, our research suggests that treaties should designate a venue, such 

as the international court in The Hague, where conflicts between BITS, FTAS 

and other regional and multi-lateral treaties can be resolved. 

Summary of Research 

In our research, development and environmental economists from the United 

States, Mexico, Brazil, Argentina, Chile, and Costa Rica wrote the report based on 

original research from across the region. In case studies on Argentina, Brazil, Bolivia, Chile, Costa Rica, Ecuador, Mexico, Uruguay, and Venezuela. The Working 

Group examined how foreign investment during the reform period has affected economic growth, environmental policy and performance, and the countries’ political 

economies. 

Beginning in the early 1990s, nations in the Americas began to liberalize their 

regimes for foreign investment. Pursued unilaterally or BITS or PTAs, a typical set 

of reforms included the elimination of performance requirements such as requirements to source from domestic firms or to export a certain percentage of production, 

restrictions on the ability to exclude certain sectors from FDI and to ‘‘screen’’ foreign 

investment for development goals, restrictions on the ability to require joint ventures or research and development facilities, and so forth. Moreover, such reforms 

alter the nature of settling disputes over foreign investment. Whereas trade agreements have traditionally relied on states to settle disputes among themselves in 

international fora, newer trade and investor agreements have ‘‘investor-state’’ dispute systems where foreign firms can directly sue a national or local government 

without host government oversight. 

These policies were advocated by the U.S. government, the World Bank, and the 

International Monetary Fund and endorsed enthusiastically by many governments 

across the Americas. They have become enshrined in the 1994 North American Free 

Trade Agreement (NAFTA) between the U.S., Canada and Mexico, which became 

the template for subsequent regional and bilateral accords, including agreements on 

the U.S.-Chile Free Trade Agreement, the U.S.-Dominican Republic-Central AmerVerDate Nov 24 2008 01:06 Jan 27, 2010 Jkt 053473 PO 00000 Frm 00094 Fmt 6633 Sfmt 6621 E:\HR\OC\53473.XXX GPO1 PsN: 53473

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ica Free Trade Agreement (CAFTA), the U.S.-Peru Free Trade Agreement and 

countless numbers of Bilateral Investment Treaties (BITS). Investment liberalization of course, has been part of a larger effort broadly referred to as the Washington 

Consensus. The broader reforms include a package of economic policies that promote 

economic development by opening national economies to global market forces. Over 

the last twenty years, governments throughout Latin America have reduced tariffs 

and subsidies, eliminated barriers to foreign investment, restored fiscal discipline by 

reducing government spending, and have generally reduced the role of the state in 

all aspects of the economy. 

The promise, among others, of following these policies is that FDI by multinational corporations will flow to developing countries and be a source of dynamic 

growth. Beyond boosting income and employment, the hope was that manufacturing 

FDI would bring knowledge spillovers that would build the skill and technological 

capacities of local firms, catalyzing broad-based economic growth; and environmental spillovers that would mitigate the domestic ecological impacts of industrial 

transformation. 

These policies and agreements have raised concerns, in part because they have 

shown poor results. Economic growth in per capita terms in the region was slower 

than in the last decades of the import substitution period—less than 2% since 1990, 

the period of the reforms. A major finding of our work is that slow growth is in part 

explained by the fact that FDI failed to lead to more total investment into Latin 

American economies. 

Among our main findings are: 

1. FDI was concentrated in a small handful of countries in the region. Brazil, 

Mexico, Argentina, Chile and Venezuela received more than 80 percent of all 

the FDI in the region; 

2. Foreign firms by-and-large located in Mexico and the Caribbean tend to 

serve as export platforms to the United States, whereas those that located 

in South America tend to sell to domestic markets in that region. 

3. FDI was attracted by traditional determinants, not necessarily whether a nation has a regional or bilateral trade and/or investment treaty or if it can 

serve as a pollution haven for foreign firms; 

4. When FDI did come, foreign firms tend to have higher levels of productivity 

and higher wages and generally increase trade in the region; yet 

5. FDI fell far short of generating ‘‘spillovers’’ and backward linkages that help 

countries develop, and in many cases wiped out locally competing firms 

thereby ‘‘crowding out’’ domestic investment. 

6. The environmental performance of foreign firms was mixed, sometimes leading to upgrading of environmental performance, and in others performing the 

same or worse than domestic counterparts. 

Working Group studies documented and analyzed the track record in specific 

countries and sectors as well: 

• In Brazil, Argentina, Mexico—three countries that have received the lion’s 

share of FDI in the region—and Costa Rica it found that: 

• Foreign firms have higher wages, productivity, and trade vis a vis domestic firms 

• However, linkages with national firms and the domestic economy in general are weak, specially in Mexico and Costa Rica 

• Although foreign firms may bring the technologies generated in their 

headquarters, they do not contribute to an increase in R&D expenditures 

in the host economies 

• In Brazil, Mexico, Chile, and Argentina 

• Virtually all foreign firms transferred environmental management systems to host countries; however 

• It is not clear that such firms were actually in compliance with host country laws and in Brazil there is little indication that foreign firms were 

more likely to be in compliance than domestic firms were; 

• There it little evidence that foreign firms are greening their supply 

chains (given that so many supply chains were wiped out from FDI); and 

• In some instances such as the forestry sector in Chile, foreign firms that 

exported through fair trade certification schemes were ‘‘upgrading’’ to 

higher levels of environmental standards; 

• In others, such in Mexico’s electronics sector, foreign firms were not exporting to meet strong standards in Europe given that their chief export 

market, the United States, does not have such standards. 


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• In Venezuela, Bolivia, Ecuador, and Uruguay 

• A Uruguayan BIT constrained the set of policies available to solve a conflict over foreign investment and transboundary environmental problems 

with Argentina; whereas 

• BITs in Bolivia, Ecuador, and Venezuela were refused by governments 

that were able to renegotiate the terms of contracts with foreign hydrocarbon firms. 

New Directions for FDI and Sustainable Development 

The Working Group found—in agreement with the broader literature on the subject—that investment regime liberalization-led FDI has had at best a limited success in Latin American countries. 

Hence, it comes as no surprise to find that virtually all newly elected governments 

in Latin America, and now your committee, are rethinking the role of FDI in their 

economies. While some countries are just beginning to debate the issue, others are 

going so far as to nationalize foreign firms. Yet, most governments are looking for 

a more balanced approach. What our research makes clear is that new policies are 

needed. Based on the research abovementioned, three broader lessons can be drawn 

out as principles for policy-making in this field: 

1. FDI is not an ends but a means to sustainable development. Simply 

attracting FDI is not enough to generate economic growth in an environmentally sustainabe manner. The report shows that even in the nations 

that received the lion’s share of FDI in the region—Brazil, Argentina, and Mexico—FDI fell short of generating spillovers and sustained economic growth. FDI 

needs to be part of a comprehensive development strategy aimed at raising the 

standards of living of the nation’s population with minimal damage to the environment. 

2. FDI policy needs to be paired with significant and targeted domestic policies that upgrade the capabilities of national firms and provide 

a benchmark of environmental protection. There are numerous countryspecific policies that are either being implemented or debated regarding ways 

in which Latin American nations can overcome information and coordination 

externalities, access to credit problems, and competitiveness issues on the part 

of their domestic firms. In this regard, lessons from Asia may be drawn, since 

many nations in that region have put in place targeted industrial policies to 

link domestic firms to foreign firms to enable domestic firms to develop into 

competitive exporters themselves. 

3. International agreements, whether at the World Trade Organization (WTO) or at the level of BITS and PTAs need to leave developing 

nations the ‘‘policy space’’ to pursue the domestic policies necessary to 

foster sustainable development through FDI. The emerging international 

regime of international investment rules is restricting the ability of developing 

nations to pursue some of the policy instruments that have been successful at 

channeling FDI for development in Asia and elsewhere. When acting collectively 

under the auspices of the WTO developing nations have largely succeeded in 

blocking proposals that would further restrict such policy space. However, slower movement in global trade talks has led to a proliferation of BITS and PTAs 

between developed and developing countries where developing countries have 

much less bargaining power and end up exchanging policy space for market access. 

Final Remarks 

I would like to thank and congratulate the Chairman and the Subcommittee for 

holding this hearing today. In the wake of the current financial crisis it is both 

timely and important to review the elements of investment obligations in U.S. trade 

and investment agreements. The 2004 model U.S. BIT outlaws measures such as 

capital controls, performance requirements, and technological transfer—all measures that the economics profession endorses and that the U.S. is advocating that 

nations across the world deploy and that we ourselves are conducting at home. 

Your hearings are an important first step in a more comprehensive review of U.S. 

trade and investment policy. I look forward to your questions, and to constructively 

working with you on these issues into the future. 

f 


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1 Enacted as part of the Trade Act of 2002, Title XXI, Section 2102(c), Pub. L. 107–210 (2002). 

Statement of Linda Menghetti 

The hearing on ‘‘Investment Protections in U.S. Trade and Investment Agreements,’’ held by the Subcommittee on Trade of the House Committee on Ways and 

Means on May 14, 2009, provided an important opportunity to consider several of 

the key issues relating to investment protections and their importance for U.S. investors and the U.S. economy. I appreciated the opportunity to testify at that hearing and very much welcome the additional opportunity to provide further views on 

the proposals made at that hearing at the request of the Chairman and Members 

of Subcommittee during the hearing. These comments address the proposals set 

forth by Professor Stumberg and others during the hearing and in written testimony 

presented that day. These comments are meant to supplement my own written testimony, submitted in conjunction with the hearing, which provides important background information on these long-running debates. 

These additional views are submitted on behalf of the Emergency Committee for 

American Trade—ECAT—an association of the chief executives of leading U.S. business enterprises with global operations. ECAT was founded over four decades ago 

to promote economic growth through expansionary trade and investment policies. 

Today, ECAT’s members represent all the principal sectors of the U.S. economy— 

agriculture, finance, high technology, manufacturing, merchandising, processing, 

publishing and services. The combined exports of ECAT companies run into the tens 

of billions of dollars. The jobs they provide for American men and women—including 

the jobs accounted for by suppliers, dealers, and subcontractors—are located in 

every state and cover skills of all levels. Today, the annual sales of ECAT companies 

exceed $2.7 trillion, and the companies employ more than 6.4 million people. 

Professor Stumberg included numerous proposals in his written testimony, many 

of which were also raised and rejected during the drafting of the 2004 U.S. Model 

BIT. I will address each issue in turn. But first, these proposals should be placed 

in appropriate context. 

As you know, the investment-related negotiating provisions of the Bipartisan 

Trade Promotion Authority Act of 2002 1 directs U.S. negotiators to pursue strong 

investment protections. The Act was the product of vigorous debate, both in the 

House and Senate, and reflects a careful balancing of the United States’ so-called 

‘‘offensive’’ and ‘‘defensive’’ interests with respect to cross-border investment. In view 

of this legislation, and in the interest of maintaining consistency between BITs 

(which, technically, were not covered by the 2002 Act) and investment chapters in 

free trade agreements, in 2003 and 2004 the Executive Branch undertook to revise 

the United States’ Model BIT in accordance with the 2002 Act’s investment negotiating objectives. 

I was an active private sector participant in the Administration’s review of the 

Model BIT in 2003 and 2004, along with many other stakeholders. I can tell you 

that the debates were intense, that they included input from all stakeholders, and 

that the agreement that was ultimately forged reflected the input of all of these 

stakeholders. The same careful balancing of U.S. interests that was embodied in the 

Act was also reflected in the 2004 Model BIT. 

Many of the changes Professor Stumberg and others now propose were considered 

and debated during the last review. The compromise positions that were worked 

out, and that are embodied in the 2004 Model BIT, narrowed the legal protections 

available to U.S. investors abroad—a significant cost to ECAT companies and other 

globally active U.S. businesses. That compromise was the result of a careful weighing of offensive positions—the interest of U.S. investors in protecting their investments abroad and obtaining a remedy for any adverse treatment by foreign governments—and defensive positions—the concerns of certain domestic constituencies interested in minimizing the theoretical possibility of the United States being held liable for the adoption or enforcement of challenged measures (although, of course, this 

has not happened to date). 

Professor Stumberg’s proposals would reopen these issues in order to further narrow, and weaken, the current legal protections available to U.S. investors abroad. 

These changes, which might look minor to a casual observer, would, in effect, constitute a dramatic reversal of longstanding, bipartisan U.S. policy. They would also 

put at risk billions of dollars of U.S. investment abroad, investment that provides 

strong benefits to the U.S. economy, U.S. economic activity, U.S. companies and 

U.S. workers. 

I now turn to address each of the proposals raised during the May 14th hearing. 


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2There was some discussion at the hearing that a forum non conveniens approach might be 

used to determine with which countries the United States should enter into a relationship with 

investor-state dispute settlement. This common law doctrine—that allows a court the discretion 

to reject jurisdiction over a case when it finds that another judicial forum is adequate, available 

and more appropriate—generally focuses less on the adequacy of the other forum and more on 

the availability of witnesses and other evidence. This doctrine is simply not appropriate or viable to use as a proxy to pick and choose with which countries the United States should enter 

into an investment treaty with investor-state dispute settlement and would represent a step 

backwards in strong legal protections that are vitally important for U.S. investors overseas and 

the economic growth and opportunities that they support here in the United States. 

Selective Negotiation of Investor-State Dispute Settlement 

During the hearing, Professor Stumberg questioned the need for investor-state 

dispute settlement with certain countries, particularly with respect to the KoreaUnited States Free Trade Agreement (KORUS FTA) and bilateral investment treaty 

(BIT) negotiations with China. It was also suggested that the negotiation of binding 

investor-state dispute resolution provisions not be a consistent U.S. negotiating objective, but should depend on the adequacy of the other country’s judicial system.2

In fact, investor-state dispute settlement is vitally needed in both those cases, as 

well as in other ongoing and future negotiations, to ensure that U.S. companies 

have a level playing field in those markets and can ensure that the obligations that 

those other countries undertake can be fully enforced before neutral tribunals. 

Notably, both Korea and China have concluded BITs with other OECD member 

countries that incorporate investor-state dispute settlement, and the United States 

and its investors should not be treated any differently. 

• Korea, for example, has BITs in place with investor-state dispute settlement 

with the following major developed countries: Austria, Belgium, the Czech Republic, Denmark, Finland, Germany, Italy, Japan, the Netherlands, Spain, 

Sweden, and the United Kingdom. 

• China has BITs in place with investor-state dispute settlement with Finland, 

Germany, and the Netherlands and trade agreements with investment chapters and investor-state dispute settlement with Singapore, among other major 

countries. 

As explained at the hearing, the United States has far fewer BITs than most 

other major capital exporting nations. Removing investor-state arbitration from the 

Korea-U.S. FTA or excluding it from an eventual U.S.-China BIT would put U.S. 

investors and their workers at a disadvantage vis-a`-vis competitors from other countries with which Korea and China have treaties, including those in Europe and 

Asia. 

Investor-state dispute settlement is a vital tool for U.S. investors to ensure a level 

playing field in foreign countries, many of which, like Korea and China, have maintained significant barriers to foreign investment. In these and many other countries, 

the investment commitments in these instruments are not reflective of the country’s 

own domestic legal protections and investor-state dispute settlement would provide 

the only way for investors to ensure that countries keep their commitments to these 

basic standards. ECAT was very disappointed that the investor-state dispute settlement process was not included in the U.S.-Australia FTA. Obviously, U.S. investors 

will still have recourse to Australia’s legal system and its respected judiciary, but 

U.S. investors lack the ability to take all of the same types of claims that would 

have been available under the FTA before Australia’s own court system. Australia’s 

refusal to accept this provision, particularly after it was included in Australia’s FTA 

with Singapore, puts U.S. companies at a competitive disadvantage. ECAT notes 

that the FTA contemplates that the availability of an investor-state dispute settlement mechanism can be revisited. 

The investor-state mechanism also has the important benefit of allowing claims 

to proceed in a de-politicized manner. Before the advent of investor-state dispute 

settlement, U.S. investors would need to request the State Department to espouse 

their claims on their behalf. Unlike other dispute settlement processes in an FTA 

or the WTO where oftentimes entire industries are affected, the espousal of an individual investor’s claim elevates an essentially private dispute to a political and diplomatic one, raising unnecessary irritants in foreign relations. From the perspective 

of investors, relying solely on the government to espouse their claims will most often 

lead to no claim being brought as governments have larger issues to address with 

their foreign counterparts. 

Investor-state dispute settlement is both vital and appropriate for investors given 

that investors have a unique relationship with capital at risk in the foreign territory 

of another government. Notably, an investor’s rights are limited to bringing investVerDate Nov 24 2008 01:06 Jan 27, 2010 Jkt 053473 PO 00000 Frm 00098 Fmt 6633 Sfmt 6621 E:\HR\OC\53473.XXX GPO1 PsN: 53473

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3 Report 107–139 of the Senate Committee on Finance, Bipartisan Trade Promotion Authority 

Act of 2002 (H.R. 3005) at 13 (emphasis added). 

ment claims only before an investor-state dispute settlement panel, not other claims 

that might fall under a broader trade agreement. The proposal raised at the hearing 

by Ms. Lee that non-investor stakeholders in an FTA should have similar rights to 

bring individual actions against a foreign government for non-investment claims is 

neither feasible, nor appropriate. Notably, an investor acquires legal rights in that 

foreign country as result of its investment, rights that other stakeholders who are 

not investors simply does not have. No international instrument creates such a private right for non-investors, and it is not clear that any government, including the 

U.S. government, would agree to create a new right of action for a class of stakeholders that do not have the relationship that an investor has by virtue of its investment in a foreign territory, an investment that brings with it domestic legal rights. 

Minimum Standard of Treatment 

In his written testimony, Professor Stumberg proposes to ‘‘[n]arrow the minimum 

standard to the elements of customary international law as explained in the U.S. 

brief in Glamis.’’ The United States, in its Counter-Memorial in the Glamis case, 

suggests that minimum standards of State conduct have been established ‘‘in only 

a few areas,’’ citing as examples the requirements: (1) to provide the ‘‘customary 

international law obligation of full protection and security;’’ and (2) to ensure that 

a ‘‘denial of justice’’ does not occur. As a preliminary matter, the U.S. Counter-Memorial does not, as Professor Stumberg appears to suggest, set forth an exhaustive 

list. Like the 2004 Model BIT discussed below, the U.S. Counter-Memorial provides 

these as examples. 

Professor Stumberg’s proposal is an overly narrow interpretation of customary 

international law and its adoption would be detrimental to U.S. interests. 

One of the effects of Professor Stumberg’s proposal would be to significantly narrow the minimum standard of treatment, particularly the fair and equitable treatment standard included in the 2004 Model BIT. While the 2004 Model BIT provides 

that fair and equitable treatment includes the obligation not to deny justice, it lists 

denial of justice as only one example. Thus, the Model BIT allows for other elements 

of the fair and equitable treatment standard—e.g., an investor’s legitimate expectations created by government commitments—to be considered as part of the minimum standard of treatment. Professor Stumberg’s proposal would eliminate this 

possibility, which is a widely accepted part of customary international law. 

Further, by defining the minimum standard of treatment to include only those 

principles of customary international law specifically identified in the Glamis brief, 

the United States would forgo the benefits of the evolutionary nature of customary 

international law. As BITs proliferate, and state practice improves (often led by the 

example of the United States), the minimum standard of treatment required by 

international law continues to evolve. U.S. investors abroad would thus be deprived 

of the evolution of these protections in the years to come. 

Professor Stumberg’s concern appears to be that the ‘‘minimum standard of treatment’’ prescribed by customary international law could be greater than the protections guaranteed under U.S. law. The risk that Professor Stumberg has identified 

is negligible. As I discussed in my written testimony, and at the hearing, the United 

States already provides strong protections both to its own citizens and to foreign investors, who have full rights to use our courts and seek the protection of our Constitution and other governing laws. The protections are embodied in the Takings, 

Due Process and Equal Protection Clauses of the Fifth and Fourteenth Amendments 

to the Constitution, the Administrative Procedure Act (APA), as well as other U.S. 

laws that establish strong protections for U.S. property rights in the United States. 

These laws protect U.S. citizens and foreign investors alike. 

In fact, Congress recognized the strength of U.S. protections in the Report of the 

Senate Committee on Finance on the investment negotiating objectives contained in 

the 2002 Act. Specifically, as I noted in my written testimony, that Report found 

that ‘‘protections of investor rights under U.S. law generally equal or exceed international law standards (including the non-discrimination and investment protection 

obligations described above).’’ 3

Such protections, however, often do not exist in host countries where U.S. companies and individuals invest. Ironically, the State Department seemed to recognize 

this in Glamis. As the State Department explained, ‘‘a minimum standard of treatment is necessary where protections under treaty-based national treatment obligations do not adequately protect aliens because the host State treats it own nationals 


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4 U.S. Counter-Memorial, Glamis Gold Ltd., v. United States of America, September 19, 2006, 

at p. 220. 5Methanex Corporation v. United States of America, Final Award of the Tribunal on Jurisdiction and Merits, August 3, 2005, at Part IV—Chapter D, para. 7. 6 438 U.S. 104 (1978). 

7See, e.g., Penn Central Transp. v. New York City, 438 U.S. 104 (1978); Lucas v. South Carolina Coastal Council, 505 U.S. 1003, 1018 (1992). 

unjustly or egregiously, and accords aliens like treatment.’’ 4 Providing broad, not 

narrow, investment protections—including under the fair and equitable treatment 

standard—provides an important check against such unfair treatment of U.S. investors, while posing no appreciable risk to the United States. 

Expropriation 

Professor Stumberg proposes that the U.S. should ‘‘[n]arrow indirect expropriation 

so that it does not apply to nondiscriminatory regulations as explained in the 

Methanex award.’’ Methanex provides, in pertinent part, that ‘‘a non-discriminatory 

regulation for a public purpose, which is enacted in accordance with due process and 

which affects, inter alia, a foreign investor or investment is not deemed 

expropriatory and compensable. . . .’’ 5 Professor Stumberg’s proposal would significantly narrow an investor’s rights and would be inconsistent with international law. 

Of course, it is the right of a sovereign government to take private property, provided that it is taken for a public purpose, in a non-discriminatory manner, on payment of prompt, adequate, and effective compensation, and in accordance with due 

process of law. This is the recognized standard under customary international law, 

and under U.S. law as well. The government may do so directly—e.g., by exercising 

eminent domain—or indirectly—e.g., by exercising regulatory authority. International and domestic law recognizes that indirect expropriation requires compensation because a government measure can impair the value of property to such an extent as to be equivalent to a direct taking. 

Professor Stumberg’s proposal would limit the right to compensation for indirect 

expropriation to measures that are discriminatory or serve illegitimate purposes. 

This would be inconsistent with customary international law, (and, in most cases, 

domestic law), which does not limit compensation to improperly motivated government takings of property. In fact, under international and domestic law, a government’s motives are largely irrelevant for determining whether expropriation has occurred. Even when the government takes property for the most noble of public purposes, compensation may be owed to those whose property is taken. Indeed, as provided in Annex B—Expropriation of the 2004 Model BIT, which itself was based on 

the landmark U.S. Supreme Court case Penn Central Transp. v. New York City,6

the analysis of whether there has been a compensable indirect expropriation is a 

case-by-case analysis where the following factors, among others, are considered: 

• The economic impact of the government action; 

• The extent to which the government action interferes with distinct, reasonable investment-backed expectations; and 

• The character of the government action. 

Professor Stumberg’s suggestion reflects a concern expressed by some that rules 

prohibiting indirect expropriation somehow discourage or prevent proper government regulation of labor standards or the environment. International businesses 

recognize that it is an important right and duty of sovereign governments to regulate labor and environmental standards. The purpose of the indirect expropriation 

provision (and of the Takings Clause of the U.S. Constitution,7 as well) is not to 

discourage regulation, but simply to ensure that regulations do not force one set of 

investors to bear the full costs of regulations that should be borne by society as a 

whole. 

In any case, there is no need to amend the 2004 Model BIT, which already provides significant limitations on an investor’s right to claim compensation for indirect 

expropriation. According to Annex B of the 2004 Model BIT, ‘‘non-discriminatory 

regulatory actions by a Party that are designed and applied to protect legitimate 

public welfare objectives, such as public health, safety, and the environment, do not 

constitute indirect expropriations,’’ except in ‘‘rare circumstances.’’ 

Further modification to that language is simply not warranted. As I warned at 

the hearing, proposals that would create a safe harbor for government regulation 

for environmental or other public purposes would put in jeopardy important U.S. 

national economic and other policy goals. Exempting environmental government regulation, for example, would allow other governments to expropriate U.S. environmental technology with impunity, undermining the ability of U.S. companies to creVerDate Nov 24 2008 01:06 Jan 27, 2010 Jkt 053473 PO 00000 Frm 00100 Fmt 6633 Sfmt 6621 E:\HR\OC\53473.XXX GPO1 PsN: 53473

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8 2004 Model BIT at Annex B. 

9 As phrased, it could even mean that U.S. subsidiaries of U.S. corporations could not invoke 

a U.S. BIT against a foreign government. I assume that that is not what he means given that 

such a result would negate the benefits of a BIT for the United States. 

ate and maintain green jobs here in the United States and to develop innovative 

new technologies. 

Definition of Investment 

Professor Stumberg proposes to narrow the definition of investment in the 2004 

Model BIT, which he claims currently ‘‘extends beyond the kinds of property that 

are protected by the takings clause of the U.S. Constitution.’’ By tying the treaty 

definition of investment to the Constitution’s Takings Clause, Professor Stumberg’s 

intent appears to be to limit the type of property that can be expropriated. However, 

the current provisions of the 2004 Model BIT already adequately address these concerns. 

The protections against expropriation only apply if government action ‘‘interferes 

with a tangible or intangible right or property interest in an investment.’’ 8 This restrictive language was introduced into the 2004 Model BIT based on the U.S. Constitution’s Takings Clause jurisprudence. Earlier U.S. BITs defined expropriation in 

terms of ‘‘investment’’ (not in terms of ‘‘property’’) and thus provided a broader scope 

of coverage for U.S. investors overseas. 

ECAT remains concerned that this 2004 change in language was itself unnecessary, given the already broad U.S. jurisprudence under the Takings Clause defining 

what constitutes property more broadly than many other jurisdictions or than Professor Stumberg suggests. The primary effect of further restrictions on the definition 

of investment is not to change the protections available to foreign investors here in 

the United States. The primary effect is that other countries, which have much 

more restrictive definitions of property interests than the United States, will have 

leeway to deny full protection for U.S. investors overseas. 

Denial of Benefits to Subsidiaries of U.S. Corporations 

Professor Stumberg proposes that the 2004 Model BIT be revised to ‘‘[l]imit ‘denial of benefits’ language so as to preclude claims by subsidiaries of U.S. corporations.’’ Professor Stumberg’s proposal could be interpreted in one of two ways. It 

could mean that no protections under the U.S. Model BIT should be provided to 

shell corporations owned and controlled by U.S. parent companies. It could also 

mean that no subsidiary of any kind of a U.S. corporation could receive protections 

under the Model BIT.9

If Professor Stumberg proposes to preclude claims against the United States by 

nominally foreign shell companies, where the ultimate owners and investors are actually U.S., not foreign, corporations, such a revision is unnecessary. The current 

Model BIT already allows the United States to deny the treaty’s protections to such 

shell company foreign investors. Specifically, Article 17(2) of the 2004 Model BIT 

provides that a party may deny benefits under the BIT to an enterprise of the other 

party, or to investments of that investor, if the enterprise ‘‘has no substantial business activities in the territory of the other Party’’ and persons of a non-party or of 

a denying party ‘‘own or control the enterprise.’’ In other words, the United States 

can deny BIT benefits to nominally foreign companies that are mere shells and that 

are actually owned by U.S. investors. This provision already protects the United 

States against such shell company claims. 

If, on the other hand, Professor Stumberg wishes to preclude legitimate subsidiaries of U.S. corporations that are incorporated in and do business in other countries from being able to avail themselves of the protections afforded under the 2004 

Model BIT when they invest in the United States, Professor Stumberg’s proposal 

would impact a striking range of companies. This is true in particular given the 

interconnected nature of the global economy and of the corporate structures of multinational companies. There is no reason, however, to deny such companies the 

BIT’s protections. If they are legitimate foreign corporations with substantial business activity in the territory in which they are incorporated, the protections afforded 

under the 2004 Model BIT should apply, whether or not there is a U.S. entity somewhere to be found in their corporate structure. Any contrary rule would ignore the 

distinct legal personality an entity acquires when it establishes a presence in another territory and does business in that territory. Notably, the theoretical concern 

that allowing such subsidiaries to pursue investor-state dispute settlement would 

result in an onslaught of cases against the United States has, of course, never materialized with any country, since the United States entered into its first BIT in 1983. 


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Emergency Stabilization Measures 

Professor Stumberg argues that the 2004 Model BIT should be revised to incorporate ‘‘the NAFTA prudential exception as a model to safeguard emergency stabilization measures.’’ This revision is unnecessary from a defensive point of view, 

and it threatens to subject U.S. investors abroad to unfair and unpredictable discrimination. 

From a defensive perspective, addition of a NAFTA-style prudential exception for 

emergency stabilization measures is unnecessary because the United States may already take appropriate stabilization measures pursuant to Article 20 of the 2004 

Model BIT, without risk of claims from foreign investors. 

Article 20 provides that ‘‘a Party shall not be prevented from adopting or maintaining measures relating to financial services for prudential reasons, including for 

the protection of investors, depositors, policy holders, or persons to whom a fiduciary 

duty is owed by a financial services supplier, or to ensure the integrity and stability 

of the financial system.’’ A footnote further clarifies that ‘‘[i]t is understood that the 

term ‘prudential reasons’ includes the maintenance of the safety, soundness, integrity, or financial responsibility of individual financial institutions.’’ 

Article 20 provides that disputes arising under the prudential carve-out are to be 

settled by consultations between the two states, and, if necessary, state-to-state arbitration that is binding on any subsequent investor-state arbitration. A broader exception simply is not necessary to protect the United States’ defensive interests. 

Further, a broader NAFTA-style exception would potentially subject U.S. investors to unfair and discriminatory treatment abroad, by broadening the opportunity 

provided for a foreign government to take adverse action against a U.S. investor. 

The government would only need to state that the measure taken was ‘‘reasonable’’ 

in order to be able to deny U.S. investors protections afforded under the BIT. The 

prudential measures exception under NAFTA must be understood in context. It is 

part of a separate, detailed set of reciprocal commitments involving the financial 

services sector. There is no basis for such a broad exception in the U.S. Model BIT. 

Capital Controls 

Professor Stumberg proposes that the 2004 Model BIT be amended to ‘‘[a]llow 

countries to impose capital controls in response to a financial crisis.’’ There is no 

defensive justification for such a provision. More importantly, the overwhelming 

consensus of economists is that encouraging capital controls would be devastating 

both for U.S. investors abroad and for the domestic markets in which capital controls are implemented. 

This issue was carefully debated in the development of the 2004 Model BIT. There 

is no reason to reopen the debate now. Article 7, which provides that each party 

‘‘shall permit all transfers relating to a covered investment to be made freely and 

without delay into and out of its territory,’’ appropriately reflects the fact that capital controls generally increase the risk that investors face and discourage foreign 

investment flows that BITs are designed to facilitate. Additionally, Article 7 already 

recognizes that a government may impose certain limitations on the right to transfer investment returns, such as when the government applies its bankruptcy, securities trading, or criminal laws, so long as the laws are equitable, non-discriminatory 

and applied in good faith. 

Exhaustion of Local Remedies 

Professor Stumberg proposes that the U.S. Model BIT should be revised to ‘‘require investors to exhaust domestic remedies before using investor-state arbitration.’’ Such a proposal would introduce unnecessary costs and delay into the process, 

and would run contrary to current international legal practice, undoing a half-century of progress in international law. 

As with many of Professor Stumberg’s proposals, the question of whether to require investors to first seek domestic remedies was carefully considered during the 

drafting of the 2004 Model BIT. The proposal was rejected. Importantly, requiring 

the exhaustion of local remedies adds unnecessary cost and delay to the dispute resolution process. It is expensive to bring a lawsuit in local courts—the investor has 

to hire local counsel and prepare a case, and, in some instances, pursue a trial. In 

the United States this can take years and cost millions of dollars. In countries with 

less sophisticated legal systems, this could take decades. 

More importantly, however, requiring that investors return to a system of mandatory local proceedings would require a U.S. investor to seek first to resolve the dispute through foreign local courts. But foreign law (unlike U.S. law) may not incorporate any of the BIT’s protections, making the requirement to resort to local courts 

a fruitless exercise. The key objective of the U.S. BIT network is to provide U.S. 

investors with legal protections that may not otherwise exist in the foreign country. 


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A requirement to resort first to local courts would also deprive an investor of a neutral forum where its claims can be heard, which lies at the heart of investor-state 

arbitration. International law has steadily progressed away from requiring the exhaustion of local remedies. A return to that system would be damaging to the investment climate, and would represent a remarkable regression of international law 

in an area where the United States has done so much to promote progress. 

Diplomatic Review 

Professor Stumberg proposes that the 2004 Model BIT should be amended to 

‘‘[e]nable a country to block a claim in sensitive sectors or to clarify the self-judging 

nature of key exceptions for security and prudential measures.’’ As a general matter, 

exceptions to investment protections should be limited in number and narrowly defined. Otherwise, such exceptions could be used to erode important investor protections. 

This is particularly true, for example, with respect to the first half of what Professor Stumberg proposes—i.e., enabling a country to block a claim in so-called ‘‘sensitive sectors.’’ Such a proposal is rife with the potential for abuse. It would allow 

a government to identify any sector in the economy as a ‘‘sensitive sector’’ and, accordingly, to block a claim against it in that sector. Singling out particular sectors 

would provide other governments the same ability to do so, with the result that 

those sectors of the economy with the most valuable foreign investment would be 

least likely to be protected. Consider the case of Venezuela, which is expropriating 

U.S. investment in a number of different sectors which it considers sensitive. 

Requiring reviews and allowing countries to designate sensitive sectors would 

change what should be a private dispute to a politicized one, as governments would 

weigh in with each other to try to stop cases from going forward. This type of review 

would negate one of the purposes of investor-state dispute settlement to keep private disputes private and non-politicized. 

In addition, the second half of Professor Stumberg’s proposal—i.e., clarifying the 

self-judging nature of exceptions for security and prudential measures—is unnecessary given the security exception in Article 18 and the broad prudential measures 

exception in Article 20 of the 2004 Model BIT. With respect to the essential security 

exception, the 2004 Model BIT provides a country with the ability to take actions 

‘‘that it considers necessary for the fulfillment of its obligations with respect to the 

maintenance or restoration of international peace or security, or the protection of 

its own essential security interests.’’ The addition of the phrase ‘‘that it considers 

necessary’’ significantly broadens the exception beyond that which was contained in 

the 1996 Model BIT. Indeed, ECAT is concerned that this language may be misconstrued and misused to allow foreign governments to evade responsibility in cases 

that do not involve essential security interests or in cases in which the foreign government’s policies created the perceived threat to essential security interests. The 

result is that the United States faces no constraints in its ability to enact reasonable 

measures necessary for its national security. From a defensive point of view, this 

is as strong a position as possible. 

In addition, and as I already discussed above, Article 20 provides a broad exception for countries to implement measures relating to financial services for ‘‘prudential reasons’’ or ‘‘to ensure the integrity and stability of the financial system.’’ Thus, 

the United States has also reserved for itself the discretion necessary to enact prudential measures without stating that it can self-judge when the exercise of discretion is justified. If a measure is truly necessary to ensure the integrity of the financial system, the United States will be able to demonstrate the necessity of such a 

measure not only on a subjective but also an objective basis. Moreover, the omission 

of self-judging language in Article 20 protects U.S. investors abroad. Were the provision self-judging, it could allow host governments to discriminate against U.S. investors without limit under the guise of the prudential measures exception. 

Investment Court 

Professor Stumberg suggests that it is necessary to ‘‘[e]stablish stronger conflict 

of interest standards for arbitrators and eventually replace private arbitrators with 

an investment court that uses independent judges with tenure.’’ Professor 

Stumberg’s proposals are unnecessary and would infringe on the party-driven nature of arbitration. 

Professor Stumberg’s conflict of interest proposal appears to be a solution without 

a problem. The current conflict of interest rules work. Generally, the government 

and the investor each select an arbitrator and then those two arbitrators select a 

third person to serve as the presiding arbitrator. The appointed arbitrators must 

disclose all actual and potential conflicts, and each side has an opportunity to chalVerDate Nov 24 2008 01:06 Jan 27, 2010 Jkt 053473 PO 00000 Frm 00103 Fmt 6633 Sfmt 6621 E:\HR\OC\53473.XXX GPO1 PsN: 53473

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lenge the appointed arbitrators. Where genuine concerns have been raised, arbitrators generally have stepped down or have been replaced. 

To the extent Professor Stumberg’s proposal for an investment court stems from 

a concern over inconsistent awards, such concerns have proven over time to be unfounded. The threat of divergent and inconsistent awards has not materialized. 

There is no need for a standing body to impose consistency, which instead emerges 

as more cases are decided over time. 

Private Right of Action 

Professor Stumberg’s suggestion that implementing legislation be enacted to 

‘‘[e]nsure that BITs do not create a private right of action for investors to enforcing 

their treaty rights in U.S. courts’’ is unnecessary and inappropriate. Professor 

Stumberg’s proposal is unnecessary because under U.S. law a treaty does not create 

rights that may be enforced in U.S. courts unless it is (i) self-executing or (ii) Congress creates such rights through legislation. No U.S. court of which I am aware 

has made such a determination with respect to a U.S. BIT or FTA investment chapter. Indeed, there is no evidence that investors have successfully prosecuted any 

such claims or are seeking to use U.S. courts over arbitration panels to bring BIT 

claims. Even if such claims were raised, that is a matter for the judiciary and does 

not require additional changes to the BIT text or U.S. implementation of a BIT. Like 

many of the proposals raised, this is a solution lacking a problem. 

This proposal is also problematic in relation with the exhaustion of local remedies 

proposal also made by Professor Stumberg. While foreign investors in the United 

States still have the benefit of strong legal protections under the U.S. legal system 

regardless of a BIT, the same is not true for U.S. investors overseas. While Professor Stumberg’s proposal only applies to the United States, it would be likely for 

any negotiating partner of the United States to follow the same approach which, if 

combined with the exhaustion of local remedies proposal, would preclude U.S. investors from having the benefits of the protections negotiated. That is, U.S. investors 

would, on the one hand, be required to exhaust local remedies and, on the other, 

be precluded from enforcing their rights in those local courts. 

Federal Preemption 

Professor Stumberg’s final proposal is that Congress should ‘‘[e]stablish protections against federal preemption and unfunded federal mandates that BITs and 

FTAs can impose on states as a result of investment disputes.’’ The assumptions underlying Professor Stumberg’s proposal are incorrect. Any award that might someday be rendered in favor of an investor would run against the U.S. Federal Government, not against any state or locality. As well, it is the U.S Department of State’s 

Office of the Legal Advisor that handles the claim for the United States, just as if 

the claim had been brought on the basis of a federal law, not on the basis of state 

or local law. Input and information is sought from states and localities, but no significant burden is placed on them to defend their own laws or actions. In addition, 

investment treaty tribunals do not require host governments to change their laws. 

Rather, if they find for an investor, an arbitral tribunal awards monetary compensation. Thus, there appears to be no need for the putative ‘‘protections’’ proposed by 

Professor Stumberg. 

Seeking to create a blanket carve out for state and local action, however, would 

undermine a major benefit of the BIT—the protection that U.S. investors seek to 

obtain in foreign states, provinces and localities. The United States simply would 

not be able to negotiate a one-sided agreement, covering its federal actions only, 

while covering the foreign government’s central and sub-central government actions. 

Failing to have such coverage would greatly diminish the value of the investment 

instrument for the United States, since U.S. investors oftentimes find themselves 

the subject of discriminatory, unfair or expropriatory actions at the sub-central 

level. 

Conclusion 

On behalf of ECAT, I appreciate the opportunity to provide these additional comments. As the Administration undertakes its review of the 2004 Model BIT, ECAT 

looks forward to working with you, the Congress and the Administration in support 

of international investment instruments that continue to expand the benefits for our 

economy, our industries, our workers and our broader national interest. 

As discussed at the hearing and in written testimony, the 2004 Model BIT represents a substantial modification from the earlier 1994 Model. It incorporated provisions that narrowed the scope of key protections to address many of the same concerns that were raised again at the May 14th hearing. 

The proposed changes discussed herein seek to address theoretical concerns that 

have not materialized either before or after the 2004 Model BIT was adopted. InVerDate Nov 24 2008 01:06 Jan 27, 2010 Jkt 053473 PO 00000 Frm 00104 Fmt 6633 Sfmt 6621 E:\HR\OC\53473.XXX GPO1 PsN: 53473

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1Sarah Anderson is the Director of the Global Economy Project at the Institute for Policy 

Studies in Washington, DC, and a co-author of the books Field Guide to the Global Economy 

and Alternatives to Economic Globalization. In 1998 and 1999, she served on the staff of the 

bipartisan International Financial Institutions Advisory Commission (the ‘‘Meltzer Commission’’). Contact: tel: 202 234 9382, email: saraha@igc.org. 

See, for example: Sarah Anderson, ‘‘Policy Handcuffs in Financial Crisis: How U.S. Trade 

and Investment Policies Limit Government Power to Control Capital Flows,’’ Institute for Policy 

Studies, February 2009 (http://www.ips-dc.org/getfile.php?id=329) and Sarah Anderson and Sara 

Grusky, ‘‘Challenging Corporate Investor Rule,’’ Institute for Policy Studies and Food and Water 

Watch, April 2007 (http://www.ips-dc.org/getfile.php?id=146). 

deed, most of these proposals were made at the time of the last BIT review and 

were rejected. Adoption of these changes going forward would weaken core investment protections at the expense of U.S. companies and their workers, to the detriment of U.S. economic interests. ECAT strongly urges that changes to the 2004 

Model BIT be considered carefully and promote stronger, not weaker, protections for 

U.S. investors overseas. 

f 

Statement of Mark Hudson Botsford 

I am a U.S. citizen who recently returned home to Washington, D.C., after spending many years in Argentina, as a private business consultant. I invested in local 

Argentine Treasury Bills, in October 2001, prior to the declaration of the largest 

sovereign debt default in history. After the default was declared, I found comfort 

in the fact that the IMF has a lending into arrears article, which declared that any 

country in default, must enter into good faith negotiations with all of its creditors 

in a transparent forum to determine capacity and willingness in any restructuring. 

Unfortunately, my hopes were dashed as the U.S. government supported the Argentine government and failed to insist on these negotiations, thereby allowing Argentina to extend deadlines on loans. In 2005, the SEC approved the restructuring process, as the majority of bonds were issued under New York State Court Jurisdiction. 

Again, the SEC failed to use precedent, and signed off on the largest haircut ever 

proposed, 70%. I did not enter the voluntary restructuring and am presently awaiting a new offer from the Argentine authorities. In 2006, the CRS submitted a report 

to Congress on this restructuring, which stated that the creditors were unable to 

generate much sympathy from Congress. As the CRS points out, I believe this is 

due to the fact that, by then, the nature of the creditors had changed. Prior to the 

default of December, 2001, Argentina had succeeded in aggressively marketing its 

debt for the first time to individuals in addition to institutions. After the default, 

since neither the U.S., through the IMF nor the SEC were effective in protecting 

U.S. investors overseas, the majority of these individuals sold their holdings at a 

big loss to large commercial banks and hedge funds. I have returned to seek a non 

legal solution to the problem of Argentina’s continuing default, and to try to impede 

other countries, such as Ecuador, from following in her footsteps. However, one avenue I will not proceed on, is that which is afforded to me by the breach of the U.S. 

Argentina BIT. It is much too costly and time consuming, and even if I get a ruling 

in my favor, the lack of enforcement provisions make any effort in this regard fruitless. The Argentine successfully characterizes her creditors as vulture funds and opportunistic international banks. The reality was that individual investors, such as 

myself, saw their life savings evaporate, while the international community looked 

the other way. In a time when major banks and multinationals are teetering on 

bankruptcy, we should not be seen as promoting sovereign debt defaults around the 

world. 

f 

Statement of Sarah Anderson1

Thank you for the opportunity to submit comments on this important issue. I 

share many of the concerns raised by other witnesses regarding the investment protections in U.S. trade and investment agreements. As the Director of the Global 

Economy Project at the Institute for Policy Studies, I have published several relevant reports, drawing on interviews with policymakers and legal experts, as well 

as individuals directly affected by investor-state cases in the United States and several other countries. My overall view is that reforms of these rules are needed to 

correct the current imbalance between the broad public interest and the interests 

of private foreign investors. 

This testimony focuses on one particular set of investment protections—the provisions that restrict the use of capital controls. Particularly in light of the current 


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2 Akira Ariyoshi, Karl Habermeier, Bernard Laurens, Inci Otker-Robe, Jorge Iva ́n CanalesKriljenko, and Andrei Kirilenko, ‘‘Capital Controls: Country Experiences with Their Use and 

Liberalization,’’ International Monetary Fund, May 17, 2000. http://www.imf.org/external/pubs/ 

ft/op/op190/index.htm. 3Daria Zakharova, ‘‘One-Size-Fits-One: Tailor-Made Fiscal Responses to Capital Flows,’’ International Monetary Fund, December 2008. http://www.imf.org/external/pubs/ft/wp/2008/ 

wp08269.pdf. 4 International Monetary Fund, ‘‘Interview with IMF mission chief for Iceland, Poul Thomsen,’’ 

December 2, 2008. http://www.imf.org/external/pubs/ft/survey/so/2008/INT111908A.htm. 5 International Monetary Fund, ‘‘The Implications of the Global Financial Crisis for Low-Income Countries,’’ March 2009. http://www.imf.org/external/pubs/ft/books/2009/globalfin/ 

globalfin.pdf. 6Kenneth Rogoff, ‘‘Rogoff: The Exuberance of India,’’ New York Times, January 31, 2009. 

http://dealbook.blogs.nytimes.com/2009/01/31/rogoff-the-exuberance-of-india/. 7 UNCTAD, World Investment Report 2008. 8 Jagdish Bhagwati, ‘‘U.S. House of Representatives Committee on Financial Services Testimony Subcommittee on Domestic and International Monetary Policy, Trade and Technology,’’ 

April 1, 2003. http://www.columbia.edu/∼jb38/testimony.pdf. 

global financial crisis, these provisions deserve much greater attention. My testimony can be summarized with the following three points, elaborated in detail below: 

1. The capital control restrictions in U.S. trade agreements and bilateral investment treaties are outmoded. Particularly since the Asian financial crisis of the late 1990s, there has been growing consensus among noted 

economists that such measures, while not a panacea, can be effective tools for 

preventing and responding to financial instability. 

2. Allowing other governments the authority to apply sensible capital 

controls is in the interest of the United States. In a globalized world, expanding the policy options to combat financial crisis makes sense for U.S. businesses, workers, and the environment. Eliminating the preferential treatment 

for foreign investors in current capital transfer rules could also help prevent foreign policy conflicts. 

3. Capital control provisions are ripe for reform. The current crisis has 

opened an important opportunity to construct new rules and institutions that 

can prevent future crises and advance stable, sustainable development. Allowing governments greater flexibility to use capital controls would be one important step towards that goal, and important precedents exist that could point the 

way. 

Detailed Discussion 

1. The capital control restrictions in U.S. trade agreements and bilateral 

investment treaties are outmoded. 

The International Monetary Fund (IMF) abandoned its blanket opposition to capital controls after several countries used these measures effectively to avoid the 

worst impacts of the Asian crisis in the late 1990s.’’ 2 In recent years, the Fund has 

advised at least two countries, Bulgaria and Croatia, to strengthen one type of capital control, reserve requirements on capital inflows.3 And when Iceland imposed 

controls on capital outflows in the aftermath of the country’s banking sector meltdown, the IMF advised the government ‘‘not to lift these restrictions before stability 

returns to the foreign exchange market.’’ 4

A March 2009 IMF report notes that ‘‘The existence of capital controls in several 

countries and structural factors have helped to moderate both the direct and the indirect effects of the financial crisis.’’ 5 Former IMF chief economist Kenneth Rogoff 

underscored this point in a New York Times article about India, in which he stated 

that the country’s stringent capital controls were helping to insulate that nation 

from the current crisis.6

Columbia University economist Jagdish Bhagwati, a strong advocate of trade liberalization, and many others have pointed out that there is little to no evidence that 

capital account liberalization is necessary for developing countries to attract foreign 

investment. In fact, six of the top ten non-OECD foreign direct investment recipients (China, Hong Kong, Russia, Brazil, Saudi Arabia, and India) have never signed 

a U.S. agreement restricting capital controls.7 In Congressional testimony, Bhagwati 

charged that the inclusion of capital control restrictions in trade agreements ‘‘seems 

therefore to be ideological and/or a result of narrow lobbying interests hiding behind 

the assertion of social purpose.’’ 8

Rogoff and Bhagwati are among a growing number of prominent economists who 

are speaking out in support of allowing governments the authority to impose capital 

controls, including Nobel Prize winners Joseph Stiglitz and Paul Krugman, Harvard 


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9See box of quotes from noted economists on pages 10–11 of the report ‘‘Policy Handcuffs in 

Financial Crisis: How U.S. Trade and Investment Policies Limit Government Power to Control 

Capital Flows,’’ by Sarah Anderson, Institute for Policy Studies, February 2009. http://www.ipsdc.org/getfile.php?id=329. 10 Roberto Gonza ́lez Amador, ‘‘Inversionistas externos sacaron del paı ́s $22 mil 190 millones,’’ 

La Jornada, Dec. 18, 2008. http://www.jornada.unam.mx/2008/12/18/index.php?section=economia 

&article=024n1eco. 11http://www.businessweek.com/ap/financialnews/D94Q2SJ89.htm. 12Daniel Tarullo, ‘‘Testimony before the Subcommittee on Domestic and International Monetary Policy, Trade and Technology, Committee on Financial Services, U.S. House of Representatives,’’ April 1, 2003. http://financialservices.house.gov/media/pdf/040103dt.pdf. 13Daniel Tarullo, ‘‘Testimony before the Subcommittee on Domestic and International Monetary Policy, Trade and Technology, Committee on Financial Services, U.S. House of Representatives,’’ April 1, 2003. http://financialservices.house.gov/media/pdf/040103dt.pdf. 

University’s Dani Rodrik, and former President of the International Economic Association Guillermo Calvo.9

2. Allowing governments the authority to use sensible capital controls is 

in the economic and foreign policy interest of the United States. 

Businesses, workers, and the environment in this country are undermined by instability in other parts of the world, as crisis countries purchase fewer U.S. products, cut environmental spending, and expand the global pool of unemployed labor. 

And when governments are constrained in their use of capital controls, they have 

few other tools to prevent speculative bubbles or stem panic-driven capital flight. 

Mexico, for example, has extremely limited authority to apply capital controls under 

the investment rules in the North American Free Trade Agreement. In the face of 

massive capital flight (foreign investors withdrew more than $22 billion in the last 

few months of 2008),10 the government has struggled to prop up the value of its currency by auctioning off nearly 18 percent of its foreign reserves.11

Depleting reserves to fight devaluation not only reduces the funds available for 

development, it also raises the risk of even further capital flight, as low reserve levels undermine investor confidence. In another attempt to restore confidence, the 

Mexican government has opened a $47 billionline of credit with the IMF, raising 

the prospect of another debt crisis that could undermine development and stability 

in the United States’ southern neighbor for many years to come. 

Daniel Tarullo, recently appointed to the Federal Reserve Board, has described 

the U.S. government’s insistence on including capital control restrictions in trade 

agreements as not only ‘‘bad financial policy and bad trade policy,’’ but also ‘‘bad 

foreign policy.’’ 12 In testimony during the debate over the Chile and Singapore free 

trade agreements in 2003, Tarullo laid out what would likely happen if a government bound by these rules were to use short-term capital controls during a severe 

financial crisis: ‘‘As the country struggles to emerge from its recession . . . U.S. investors file their claims for compensation. And, of course, under the bilateral trade 

agreement they are entitled to that compensation. Thus the still-suffering citizens 

of the country are treated to the prospect of U.S. investors being made whole while 

everyone else bears losses from an economic catastrophe that has afflicted the entire 

nation. Regardless of what one thinks of the merits of capital controls, one would 

have to be naı ̈ve not to think that an anti-American backlash would result.’’ 13

This gloomy scenario has even greater resonance today, at a time when ordinary 

taxpayers here and around the world are being asked to shoulder the bulk of the 

risk and cost of financial recovery. This is an important time to ensure that international rules achieve a proper balance between the public interest and private financial interests. 

3. Capital control provisions are ripe for reform. 

The investment rules in U.S. trade and investment agreements should be revised 

to allow governments greater flexibility to use capital controls as one tool for preventing or responding to financial instability. The following is a list of possible reforms, based on existing precedents. 

Dispute settlement: Given the sensitive context in which many governments 

turn to capital control measures, there is a strong argument that the right to investor-state dispute settlement should not apply to capital transfers provisions. At the 

very least, there should be a government screening process to examine investor 

claims and prevent those that would have a significantly negative impact on the 

public interest from moving forward. The U.S. model bilateral investment treaty 

sets a relevant precedent by requiring that appropriate authorities of the two govVerDate Nov 24 2008 01:06 Jan 27, 2010 Jkt 053473 PO 00000 Frm 00107 Fmt 6633 Sfmt 6621 E:\HR\OC\53473.XXX GPO1 PsN: 53473

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14 2004 U.S. Model Bilateral Investment Treaty. http://www.ustr.gov/assets/Trade_Sectors/Investment/Model_BIT/asset_upload_file847_6897.pdf. 15 United Nations Conference on Trade and Development, ‘‘Transfer of Funds,’’ 2000. http:// 

www.unctad.org/en/docs/psiteiitd20.en.pdf. 16 ASEAN Comprehensive Investment Agreement, February 26, 2009. http:// 

www.aseansec.org/22218.htm. 17 North American Free Trade Agreement Final Text, Article 2104. http://www.nafta-secalena.org/en/view.aspx?x=343&mtpiID=155#A2104. 18Deborah Siegel, ‘‘Using Free Trade Agreements to Control Capital Account Restrictions: 

Summary of remarks on the Relationship to the Mandate of the IMF,’’ 10 ISLA Journal of International Comparative Law, 2004. http://www.aprnet.org/index.php?a=show&c=Volume%2015 

%20June%202007&t=journals&i=46. 19 Akira Ariyoshi, Karl Habermeier, Bernard Laurens, Inci Otker-Robe, Jorge Iva ́n CanalesKriljenko, and Andrei Kirilenko, ‘‘Capital Controls: Country Experiences with Their Use and 

Liberalization,’’ International Monetary Fund, May 17, 2000. http://www.imf.org/external/pubs/ 

ft/op/op190/index.htm. 

ernments make determinations that are binding on arbitral tribunals with regard 

to financial services and taxation-related claims.14

Balance of payments derogation: Many existing international agreements 

allow for restrictions on capital transfers in circumstances in which a host country 

is confronted with a balance of payments crisis. The World Trade Organization’s 

General Agreement on Trade in Services, the OECD’s Capital Movements Code, and 

the IMF’s Articles of Agreement allow capital controls in such crisis periods, as long 

as they are temporary and non-discriminatory.15 In February 2009, the ASEAN nations also agreed to an investment agreement that includes a balance of payments 

safeguard, as well as an exception for circumstances in which ‘‘movements of capital 

cause, or threaten to cause, serious economic or financial disturbance in the member 

state.’’ 16

Article 2104 of NAFTA also allows for temporary capital controls in times of ‘‘serious balance of payments difficulties.’’ 17 However, the agreement includes two pages 

of conditions limiting the use of such measures, even in such crisis periods. For example, governments opting to use this policy tool must agree to enter into consultations with the IMF and adopt the Fund’s policy recommendations on ‘‘economic adjustment measures.’’ This is extremely controversial, as the IMF has been widely 

criticized in past crises and in the current one for imposing anti-cyclical conditions, 

such as freezes in stimulatory social spending and unemployment benefits, tax increases, and service rate hikes. Capital control measures under NAFTA must also 

meet the legal standards of being ‘‘no more burdensome than necessary’’ and ‘‘avoid 

unnecessary damage’’ to the interests of the other Party. Thus, while NAFTA technically offers a balance of payments exception, the hands of government officials are 

still quite tightly bound. 

Exceptions for crisis periods were further watered down in subsequent U.S. trade 

agreements and are completely absent from U.S. bilateral investment treaties. The 

governments of Singapore and Chile reportedly requested waivers for capital control 

rules during crisis periods in the U.S. trade agreements with those countries. The 

Bush administration refused, offering only to create special dispute settlement procedures for claims related to capital transfers. Under these procedures, foreign investors can still sue for damages over measures that ‘‘substantially impede transfers’’—they just need to wait an extra six months before filing their claims. A senior 

IMF legal counsel called the U.S. refusal to grant such a waiver ‘‘draconian’’ and 

complained that the rules might interfere with the IMF’s own power to request that 

a government adopt capital controls.18

Broader exception for financial stability measures: Allowing exceptions during times of crisis would be a positive, but insufficient step forward. Many economists argue that capital control measures are most useful if they are enacted ‘‘when 

the sun is shining.’’ Once the dark clouds of crisis become evident, it can be too late 

for such controls to be effective. 

Chile’s encaje (‘‘strongbox’’ in Spanish) is often cited as an example of effective use 

of capital controls through an ongoing policy. Throughout most of the 1990s, the 

Chilean government subjected capital inflows to a one-year, non-interest paying deposit with the central bank. The deposit requirement varied from 10 to 30 percent, 

and the penalty for early withdrawal ranged from 1 to 3 percent. Chile faired better 

than most other Latin American countries during the Mexican peso crisis in 1994 

and the Asian crisis a few years later. An IMF research review concluded that the 

encaje, combined with other financial sector reforms, allowed the government more 

monetary policy autonomy and shifted the composition of foreign investment from 

‘‘hot money’’ towards the longer term.19 After entering into discussions of a possible 

trade agreement with the United States, the Chilean government eliminated the 


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20 Eduardo Levy Yeyati, Sergio L. Schmukler, Neeltje Van Horen, ‘‘Crises, Capital Controls, 

and Financial Integration,’’ Policy Research Working Paper 4770, World Bank, November 2008. 

http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2008/11/06/ 

000158349_20081106083956/Rendered/PDF/WPS4770.pdf. 21 Norway model bilateral investment treaty, 2007. http://ita.law.uvic.ca/documents/ 

NorwayModel2007.doc. 

encaje in 1998. In recent years, however, numerous countries have used Chileanstyle controls on inflows.20

One example of a broader exception for capital controls to support financial stability can be found in the Norwegian government’s 2007 model bilateral investment 

treaty. This agreement allows for restrictions on capital flows when necessary to ensure compliance with laws and regulations concerning financial security or the prevention and remedying of environmental damage.21 The treaty requires equitable, 

non-discriminatory and good faith application of the laws. Similar language could 

be added to the current list of exceptions to the capital control restrictions in U.S. 

trade and investment agreements. 

Conclusion 

I would like to thank the Subcommittee for taking on the task of reviewing the 

investment rules in U.S. trade and investment agreements to ensure that they advance the public interest. This is particularly timely in light of the current financial 

crisis. The U.S. Congress has a tremendous opportunity to apply lessons from past 

crises and work with counterparts in other nations to build a more equitable, sustainable, and stable global economy. 

f 

Statement of Todd Tucker 

I thank Subcommittee Chairman Levin and the other Members of the Ways & 

Means Committee for this opportunity to submit written testimony on behalf of Public Citizen for the record for the Hearing on Investment Protections in U.S. Trade 

and Investment Agreements. My testimony can be summarized with the following 

three points, elaborated in detail below: 

1. The record of the North American Free Trade Agreement (NAFTA) 

demonstrates why removing harmful investment provisions from international agreements is in the interest of the United States and its trading partners. NAFTA’s investment chapter provides incentives to offshore jobs 

by removing many of the costs and risks of relocating production offshore. It 

also subjects U.S. environmental, consumer and other public-interest laws to 

challenge by foreign investors empowered to demand U.S. government compensation directly in foreign tribunals for domestic laws they deem to undermine their expected future profits. The investment chapter of the Central America Free Trade Agreement (CAFTA) expanded on the definition of foreign investments that were provided special protections and rights. Instructions in the 

2002 Fast Track—that U.S. trade agreements not provide greater rights to foreign investors than are provided to U.S. investors under the U.S. Constitution— 

have been systematically ignored by U.S. negotiators. As a result, CAFTA, various FTAs approved after CAFTA, and the three leftover Bush ‘‘Free Trade 

Agreements’’ (FTAs) all contain provisions that provide greater substantive and 

procedural rights to foreign investors. Not one word of the investment chapters 

of the FTAs was altered to remedy these problems in the May 2007 revisions 

to the Bush FTAs. The non-binding preambular language added to these agreements has no legal effect and fails to address the investment chapters’ problems. 

2. We support President Barack Obama’s campaign pledges to overhaul the investment provisions of U.S. trade agreements. 

3. In order for President Obama to fulfill these commitments, a set 

of specific changes must be made to current and prospective trade and 

investment agreements. 


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1For instance, NAFTA Article 1105. 

For instance, U.S.-Peru FTA Article 10.28. 2See e.g. NAFTA Article 11.5 or CAFTA Article 10.5. 

3See e.g. NAFTA Article 11. 2 or CAFTA Article 10.3 

4See e.g. NAFTA Article 11.9 or CAFTA Article 10.6. 

5See e.g. NAFTA Article 11.9 or CAFTA Article 10.8. 

6See e.g. NAFTA Article 11.10 and 11.39 or CAFTA Article 10.7 and 10.28. 

7Letters from these groups and others can be accessed at: http://www.citizen.org/trade/subfederal/inv. 

1. The record of NAFTA demonstrates why removing harmful investment 

provisions from international agreements is in the interest of the 

United States and its trading partners. 

NAFTA’s investor protections were among the most controversial aspects of the 

pact, and an expanded version of these were also included in later trade agreements. These pacts grant foreign investors a private right of action to enforce their 

trade-agreement foreign-investor rights. Through these, they can challenge government policies in international tribunals at the World Bank and United Nations and 

demand host-government compensation for policies that they consider to have impaired their new trade-agreement rights. This includes compensation for lost profits 

when government regulatory policy undermines their ‘‘expectation of gain or profit.’’ 1 The special foreign-investor privileges eliminate the uncertainty and costs of 

having to use ‘‘host’’ country courts to settle many common disputes. Thus, effectively, these investment rules facilitate the relocation of investment offshore to lowwage venues by eliminating many of the costs and risks of such relocation for U.S. 

investors and firms. 

Specifically, the investment chapters in NAFTA, CAFTA and various NAFTAstyle FTAs set a ‘‘minimum standard of treatment’’ that signatories must provide 

foreign investors,2 prohibit foreign investors from being treated less favorably than 

domestic investors,3 ban common performance requirements on foreign investors 

(such as domestic-content laws),4 and forbid limits on capital movements, such as 

currency controls.5 Additionally, these pacts provide foreign investors operating in 

the United States with greater compensation rights for extended categories of ‘‘expropriation’’ or ‘‘takings’’ than U.S. companies have under domestic law, including 

for ‘‘indirect takings’’ or measures ‘‘tantamount to’’ a takings.6 These trade-pact investor rules contain no sovereign-immunity shield for governments, a radical departure from longstanding U.S. protections. 

During the debate surrounding the 2002 grant of Fast Track authority, dozens of 

groups and organizations representing state and local legislative and judicial officials weighed in, demanding that Fast Track contain provisions to ensure that foreign investors would not be granted ‘‘greater rights’’ in trade-agreement investment 

chapters than U.S. firms have under the U.S. Constitution. These groups include 

the Conference of Chief Justices, National Association of Attorneys General, U.S. 

Conference of Mayors, National Association of Counties, National Association of 

Towns and Townships, National League of Cities, and National Conference of State 

Legislatures.7 The next trade agreements negotiated did contain some improvements with regard to the transparency of trade-tribunal operations but unfortunately failed to meet the demands by state and local officials and others—again providing foreign investors greater rights than the U.S. Constitution provides to U.S. 

businesses and citizens. 

During the time-period which Fast Track was operational from 2002–2007, the 

Bush administration sought to expand NAFTA-style investor rights to new countries 

via bilateral and regional trade agreements, including the U.S.-Chile FTA, U.S.- 

Singapore FTA, U.S.-Morocco, CAFTA, U.S.-Oman FTA, U.S.-Peru FTA, and proposed agreements with Panama, Colombia, and Korea. USTR also has pushed to put 

these extraordinary foreign-investor privileges into the WTO, but the majority of 

WTO member countries have flatly refused. The raft of new agreements with the 

foreign-investor privileges are sure to spawn new cases and new liability for U.S. 

taxpayers, who must foot the bill if foreign investors succeed in challenging state 

or federal laws—as well as face the consequences of not having vital environmental 

health, safety and zoning policies enforced. 

Public Citizen has uncovered 59 of these claims filed thus far by corporate interests and investors under NAFTA’s Chapter 11. While only a small number of these 

cases have been finalized, the track record of cases and claims demonstrate an array 

of attacks on public policies and normal regulatory activity at all levels of government. The cases have a common theme: they seek compensation for government actions that would not be subject to such demands under U.S. law, and claim violations of property rights established in NAFTA that extend well beyond the robust 


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8Mary Bottari and Lori Wallach, ‘‘NAFTA Threat to Sovereignty and Democracy: The Record 

of NAFTA Chapter 11 Investor-State Cases 1994–2005,’’ Public Citizen’s Global Trade Watch, 

February 2005. 9http://www.citizenstrade.org/pdf/QuestionnairePennsylvaniaFairTradeCoalition040108FINAL _SenatorObamaResponse.pdf. 

10http://www.citizen.org/documents/TXFairTradeCoalitionObama.pdf. 11Democratic National Convention Committee, ‘‘The 2008 Democratic Party Platform: Renewing America’s Progress,’’ August 25, 2008. Available at http://www.democrats.org/a/party/platform.html. 12Todd Tucker, ‘‘Fair Trade Gets an Upgrade,’’ Public Citizen’s Global Trade Watch, November 2008. 

property rights the U.S. Supreme Court has interpreted are provided by the U.S. 

Constitution. 

Under NAFTA, around $69 million has been paid out by governments in corporate 

challenges against toxic-substance bans, logging rules, operating permits for a toxicwaste site, and more.8 Although not explored in detail in this testimony, similar 

troubling provisions exist in U.S. bilateral investment treaties. Appendix I contains 

information on both concluded and pending NAFTA investor-state cases through the 

beginning of 2009, while pages 4–7 of this testimony include a lengthier critique of 

specific aspects of the NAFTA-style investor rights that have been included as 

Chapter 10 in more recent FTAs, such as the Bush administration’s U.S.-Panama 

FTA. 

2. We support President Barack Obama’s campaign pledges to overhaul 

the investment provisions of U.S. trade agreements. 

President Obama campaigned on a whole series of specific trade-reform commitments. Whether he will meet his pledges to the American people will be tested by 

whether the Obama administration continues with more Bush NAFTA-style FTAs, 

such as the Panama FTA, or conducts the promised repair of the existing trade 

agreements and develops a new policy that, as President Obama said, benefits the 

many, not only a few special interests. Specifically, President Obama pledged to 

remedy the following investment provisions that the Panama FTA would replicate: 

• Obama answered ‘‘yes’’ to the question: ‘‘Will you commit to renegotiate 

NAFTA to eliminate its investor rules that allow private enforcement 

by foreign investors of these investor privileges in foreign tribunals 

and that give foreign investors greater rights than are provided by 

the U.S. Constitution as interpreted by our Supreme Court thus promoting offshoring?’’ 9

• He also said: ‘‘While NAFTA gave broad rights to investors, it paid only lip 

service to the rights of labor and the importance of environmental protection. 

We should amend NAFTA to make clear that fair laws and regulations written to protect citizens in any of the three countries cannot be overridden simply at the request of foreign investors.’’ 10

Similar language was included in the Democratic Party platform, which stated: 

‘‘We will not negotiate free trade agreements that stop the government from protecting the environment, food safety or the health of its citizens, give greater rights 

to foreign investors than to U.S. investors, require the privatization of our vital public services, or prevent developing country governments from adopting humanitarian 

licensing policies to improve access to life-saving medications. We will stand firm 

against agreements that fail to live up to these important benchmarks.’’ 11

Campaigning on these themes stretched beyond the presidential races, to congressional races in both chambers of Congress, from Florida to New Mexico, from Colorado to New York. Indeed, successful candidates in the 2006 and 2008 races ran on 

a resounding platform of fundamental overhaul of U.S. trade and economic policies. 

In the two cycles, there was a combined shift of 72 members in the fair-trade composition of Congress.12

Concerns with trade-pact investment provisions have long stretched across party 

lines and throughout the Democratic Caucus, as shown by these quotes from the debate around the Central America Free Trade Agreement (CAFTA). Conservatives, 

such as former Rep. Butch Otter, now the Republican governor of Idaho, expressed 

concern with FTA investment provisions, saying: ‘‘I’d like to draw your attention to 

the fact that CAFTA contains 1,000 pages of international law establishing, among 

other things, property rights for foreign investors that may impose restrictions on 

U.S. land-use policy. Chapter 10 of CAFTA outlines a system under which foreign 

investors operating in the United States are granted greater property rights than 


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13 Rep. Clement LeRoy ‘‘Butch’’ Otter (R–Idaho), Floor Statement on CAFTA, July 29, 2005. 14On file with Public Citizen. 15The Article 10.29 text would have to be modified to exclude the stricken clauses below: ‘‘investment means every asset that an investor owns or controls, directly or indirectly, that has 

the characteristics of an investment, including such characteristics as the commitment of capital 

or other resources, the expectation of gain or profit, or the assumption of risk. Forms that an 

investment may take include: (a) an enterprise; (b) shares, stock, and other forms of equity participation in an enterprise; (c) bonds, debentures, other debt instruments, and loans;7 8 (d) futures, options, and other derivatives; (e) turnkey, construction, management, production, concession, revenue-sharing, and other similar contracts; (f) intellectual property rights; (g) licenses, 

authorizations, permits, and similar rights conferred pursuant to domestic law;9 10 and other 

tangible or intangible, movable or immovable property, and related property rights, such as 

leases, mortgages, liens, and pledges.’’ 

U.S. law provides for our own citizens! Mr. Speaker, that’s not encouraging free 

trade. That’s giving away our natural resources and our national sovereignty.’’ 13

Meanwhile, New Democrat Coalition member Rep. Jane Harman (D–Calif.) and 

other representatives said: 

‘‘We wanted to draw your attention to—the threat that the investor rights rules 

in the Central America-Dominican Republic Free Trade Agreement (CAFTA) pose 

to important state and local laws and regulations that protect the environment 

and public health. Like Chapter 11 of NAFTA, the investor rights provisions of 

CAFTA give foreign corporations the power to demand payment from the U.S. 

when public interest protections affect a company’s commercial interests . . . The 

State of California has now joined state and local government groups in saying 

that U.S. trade negotiators failed to heed the lessons of NAFTA in their negotiation of the investor rights rules in CAFTA. We hope you will join us in opposing 

CAFTA.’’ 14

The concern about these expansive foreign investor rights and their private enforcement across party and caucus lines is logical, since NAFTA–CAFTA-style foreign investor provisions can undermine areas of concern across the entire political 

spectrum in Congress and the country. 

3. In order for President Obama to fulfill these commitments, a set of specific changes must be made to current and prospective trade and investment agreements. 

The Investment chapters of the Panama, Colombia, and Korea FTAs need the fundamental changes listed below in order to deliver on President Obama’s campaign 

commitments. These changes are also necessary to meet the concerns raised by the 

AFL–CIO, Change to Win, Public Citizen, and other groups in 2007, when Democratic congressional trade committee leaders and the White House discussed renegotiating aspects of the four Bush-negotiated agreements. (Indeed, this section of the 

testimony closely tracks the documents describing necessary fixes to the FTA investment chapters submitted by many environmental, consumer, and labor organizations at that time.) These changes are also necessary for ensuring pacts meet the 

2002 Trade Promotion Authority standard of not providing foreign investors with 

greater rights than those provided to domestic firms/investors by the U.S. Constitution. (The Articles below refer to the Panama FTA, but similar if not identical articles can be found in each agreement, meaning similar if not identical changes are 

needed in the Colombia and Korea FTAs as well.) 

1. To conform with U.S. taking laws, the Panama FTA’s definition of investment 

at Article 10.29 must be bifurcated so that the current expansive definition does not 

apply to claims for compensation for expropriation under Article 10.7(1). The current 

definition covers all provisions of the investment agreements and extends beyond 

the commitment of capital or the acquisition of real property or other tangible assets. To comply with U.S. takings law, the highly subjective standards used to define an investment subject to compensation—including expectation of gain or profit, 

or the assumption of risk—must be removed, as such actions are not considered 

forms of property under U.S. law regarding expropriation claims. To bring the 

FTA standard into compliance with U.S. property rights takings law, Article 10.29 must be amended to strike the categories of property that extend 

beyond commitment of capital or the acquisition of real property or other 

tangible assets.15 The expectation of gain or profit, or the assumption of risk 

should not qualify as investment as it does in the Panama FTA and the other past 

and current Bush FTAs. Finally, the renegotiated definition must establish that a 

mere pledge of capital does not establish an investment, but rather ‘‘investment’’ 

must be defined to include the actual physical presence of capital. 


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16 Annex 10–A: ‘‘Customary International Law: The Parties confirm their shared understanding that ‘customary international law’ generally and as specifically referenced in Articles 

10.5, 10.6, and Annex 10–B results from a general and consistent practice of States that they 

follow from a sense of legal obligation. With regard to Article 10.5, the customary international 

law minimum standard of treatment of aliens refers to all customary international law principles that protect the economic rights and interests of aliens.’’ 

2. The Panama FTA must be amended to explicitly state that the minimum standard of treatment grants no new substantive rights and no greater due process rights 

than what U.S. citizens currently possess under the due process clause of the U.S. 

Constitution. Currently, the ‘‘fair and equitable’’ language, if viewed as an independent standard, would invite an investment tribunal to apply its own view of 

what is ‘‘fair’’ or ‘‘equitable,’’ unbounded by any limits in U.S. law. Moreover, those 

terms are inherently subjective. The Annex that was added to CAFTA and included 

in recent FTAs—which seeks to define ‘‘the minimum standard of treatment’’ that 

is guaranteed to foreign investors—fails to accomplish Congress’ goal of foreclosing 

arbitral panels’ discretion to read new substantive rights into this standard 

unbounded by U.S. law limits. This can be remedied by replacing the Panama 

FTA’s circular Annex 10–A language 16 with the following: ‘‘The Parties confirm their shared understanding that the minimum standard of treatment, 

defined at Article 10.5 as ‘fair and equitable treatment,’ grants no new substantive rights and no greater due process rights than what U.S. citizens 

currently possess under the due process clause of the United States Constitution.’’ 

3. U.S. takings jurisprudence permits compensation for direct takings of real property, but only allows compensation in the rarest of situations when government action does not involve an actual expropriation, but some lesser interference with 

property rights. Democrats successfully defeated a 1990s push to establish ‘‘regulatory takings’’ compensation in U.S. law so as to preclude demands for compensation arising from the costs of complying with environmental, land-use and other regulations. To conform with the no-greater-rights standard, the FTAs must permit 

compensation only for direct takings and indirect takings that meet the extremely 

narrow U.S. law standard of a complete and permanent destruction of all value of 

the entirety of a property. (The holding in Penn Central Transportation Co. v. New 

York City, 438 U.S. 104 (1978).) This problem can be remedied by adding the 

following clause to the Panama FTA’s Annex 10–B(4): ‘‘government actions 

that merely diminish the property’s value but do not destroy all value of 

the entire property permanently is not an indirect taking.’’ 

4. To be consistent with U.S. law (i.e. not provide greater rights) investor-state 

compensation should be available only for instances of direct expropriation of a foreign investors’ tangible property. Further, there should be no, not ‘‘rare,’’ circumstances when non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public 

health, safety, and the environment, constitute an indirect expropriation. An Annex 

added to recent FTAs in response to Congress’ concerns that trade-agreement investment rules provide compensation for regulatory takings actually creates a new 

conflict with U.S. property rights law. Under U.S. law, there are no circumstances 

when non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives that do not extinguish all value 

of a property would be subject to compensation. The Panama FTA’s Annex 10– 

B(4)(b) states that only in ‘‘rare circumstances’’ can such policies be the basis for 

compensation. This can be remedied by striking the words ‘‘either’’ and ‘‘or 

indirectly’’ in Article 10.7(1), striking ‘‘or intangible’’ from Annex 10–B(2) 

and striking ‘‘Except in rare circumstances’’ from Annex 10–B(4)(b), and (as 

noted) adding the following clause to Annex 10–B(4): ‘‘government actions 

that merely diminish the property’s value but do not destroy all value of 

the entire property permanently is not an indirect taking.’’ 

5. One of the most controversial provisions of investment chapters is the investorstate dispute resolution mechanism. As we have seen under NAFTA, the investorstate mechanism has been used to challenge legitimate public-interest measures. It 

should be sufficient that an investor make use the domestic legal systems to bring 

a claim or, if not satisfied, push his/her respective government for state-state dispute settlement. The state-state approach has precedent in the U.S.-Australia FTA. 

The above amendments limit to U.S. law the standards that would be applied by 

investor-state tribunals. However, the above fixes do not remedy the core violation 

of the no-greater-rights standard—which is the very opportunity for a foreign investor operating within the United States to seek remedy before an investor-state tribunal, while U.S. investors and firms are limited to seeking remedy in U.S. courts. 


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17 USTR suggested that ‘‘the four pending FTAs (as well as the other FTAs we have concluded 

in the past five years) fully achieve’’ the congressional requirement that no foreign investors not 

be accorded greater rights than U.S. investors operating in the United States. See http:// 

ustr.gov/assets/Document_Library/Fact_Sheets/2007/asset_upload_file146_11282.pdf. 18Key: * Indicates date Notice of Intent to File a Claim was filed, the first step in the NAFTA 

investor-state process, when an investor notifies a government that it intends to bring a NAFTA 

Chapter 11 suit against that government. 

** Indicates date Notice of Arbitration was filed, the second step in the NAFTA investorstate process, when an investor notifies an arbitration body that it is ready to commence arbitration under NAFTA Chapter 11. 

To remedy the violation of the no-greater-rights standard, the Panama 

FTA’s Section B (Articles 10.15–10.27) of the Investment Chapter must be 

stricken. Government-government enforcement action, based on the renegotiated terms described above, would provide recourse for actual acts 

of direct expropriation, while safeguarding legitimate public-interest laws 

from challenge and ensuring foreign investors are not provided greater 

rights than domestic investors operating domestically. 

6. We are deeply concerned that the provisions on transfers, Article 10.8, would 

limit governments’ ability to use legitimate measures designed to restrict the flow 

of capital in order to protect themselves from financial instability. Without adequate 

measures to prevent and respond to such financial instability, particularly in developing countries, broad sustainable development will remain out of reach for many 

developing countries. The increased frequency and severity of financial crises also 

hurts U.S. economic interests, as crisis-stricken countries devalue their currencies 

and flood the U.S. market with under-priced exports in order to recover. Thus, Article 10.8 should be amended to provide for reasonable capital controls. 

In conclusion, recent attempts to change aspects of the NAFTA investor template—including language inserted into the 2002 Fast Track (which resulted in the 

yet-more-expansive CAFTA investor terms), or the May 10, 2007 agreement between 

the Bush administration and certain Members of Congress (which did not change 

a word of the FTAs’ investment chapters),—did not address these issues. In particular, the May 10 deal’s insertion of non-binding preambular language to the FTAs 

is galling. As a matter of law, the actual binding provisions of the FTAs’ investment 

chapters described above trump the non-binding preambular language which 

bizarrely states that ‘‘foreign investors are not hereby accorded greater substantive 

rights with respect to investment protections than domestic investors under domestic law where, as in the United States, protections of investor rights under domestic 

law equal or exceed those set forth in this Agreement’’—even though in fact that 

is precisely what the agreement’s binding legal text does. No arbitral tribunal is 

bound to the FTA’s hortatory preambular language. Rather, future cases would be 

decided on the actual agreement text, which as noted above is severely flawed. That 

no changes were made to the investment chapter is a point about which the Bush 

administration bragged in its fact sheets on the May 2007 deal.17 Only by changing 

the binding language through renegotiation can the problems discussed above be 

remedied. 

APPENDIX I: MORE DETAIL ON NAFTA INVESTOR–STATE CASES18

CASES IN WHICH INVESTORS OBTAINED PAYMENT FOR CHALLENGES 

OF PUBLIC–INTEREST AND OTHER LAWS 

Corporation or 

Investor v. Country Venue Damages Sought 

Status of 

Case Issue 

Ethyl v. Canada 

April 14, 1997* 

UNCITRAL $201 million Settled; 

Ethyl 

win, $13 

million 

U.S. chemical company 

challenged Canadian 

environmental ban of 

gasoline additive MMT. 

July 1998: Canada loses 

NAFTA jurisdictional 

ruling, reverses ban, 

pays $13 million in 

damages and legal fees 

to Ethyl. 


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CASES IN WHICH INVESTORS OBTAINED PAYMENT FOR CHALLENGES 

OF PUBLIC–INTEREST AND OTHER LAWS—Continued 

Corporation or 

Investor v. Country Venue Damages Sought 

Status of 

Case Issue 

S.D. Myers v. Canada 

July 22, 1998* 

Oct. 30, 1998** 

UNCITRAL $20 million S.D. 

Myers 

win, $5 

million 

U.S. waste treatment 

company challenged 

temporary Canadian 

ban of PCB exports that 

complied with multilateral environmental 

treaty on toxic-waste 

trade. 

November 2000: Tribunal dismissed S.D. 

Myers claim of expropriation, but upheld 

claims of discrimination 

and determined that the 

discrimination violation 

also qualified as a violation of the ‘‘minimum 

standard of treatment’’ 

foreign investors must 

be provided under 

NAFTA. Panel also stated that a foreign firm’s 

‘‘market share’’ in another country could be 

considered a NAFTAprotected investment. 

February 2001: Canada 

petitioned to have the 

NAFTA tribunal decision overturned in a Canadian Federal Court. 

January 2004: The Canadian federal court 

dismissed the case, finding that any jurisdictional claims were 

barred from being 

raised since they had 

not been raised in the 

NAFTA claim. The federal court judge also 

ruled that upholding 

the tribunal award 

would not violate Canadian ‘‘public policy’’ as 

Canada had argued. 

Pope & Talbot 

Dec. 24, 1999* 

March 25, 1999** 

UNCITRAL $381 million P&T win, 

$621,000 

U.S. timber company 

challenged Canadian 

implementation of 1996 

U.S.-Canada Softwood 

Lumber Agreement. 


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CASES IN WHICH INVESTORS OBTAINED PAYMENT FOR CHALLENGES 

OF PUBLIC–INTEREST AND OTHER LAWS—Continued 

Corporation or 

Investor v. Country Venue Damages Sought 

Status of 

Case Issue 

April 2001: Tribunal 

dismissed claims of expropriation and discrimination, but held 

that the rude behavior 

of the Canadian government officials seeking to 

verify firm’s compliance 

with lumber agreement 

constituted a violation 

of the ‘‘minimum standard of treatment’’ required by NAFTA for 

foreign investors. Panel 

also stated that a foreign firm’s ‘‘market access’’ in another country 

could be considered a 

NAFTA-protected investment. 

Metalclad v. Mexico 

Dec. 30, 1996* 

Jan. 2, 1997** 

ICSID $90 million Metalclad 

win, $15.6 

million 

U.S. firm challenged 

Mexican municipality’s 

refusal to grant construction permit for 

toxic waste facility unless the firm cleaned up 

existing toxic waste 

problems that had resulted in the facility 

being closed when it 

was owned by a Mexican firm from which 

Metalclad acquired the 

facility. Metalclad also 

challenged establishment of an ecological 

preserve on the site by 

a Mexican state government. 

August 2000: Tribunal 

ruled that the denial of 

the construction permit 

and the creation of an 

ecological reserve are 

tantamount to an ‘‘indirect’’ expropriation and 

that Mexico violated 

NAFTA’s ‘‘minimum 

standard of treatment’’ 

guaranteed foreign investors, because the 

firm was not granted a 

‘‘clear and predictable’’ 

regulatory environment. 


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CASES IN WHICH INVESTORS OBTAINED PAYMENT FOR CHALLENGES 

OF PUBLIC–INTEREST AND OTHER LAWS—Continued 

Corporation or 

Investor v. Country Venue Damages Sought 

Status of 

Case Issue 

October 2000: Mexican 

government challenged 

the NAFTA ruling in 

Canadian court alleging 

arbitral error. A Canadian judge ruled that 

the tribunal erred in 

part by importing transparency requirements 

from NAFTA Chapter 

18 into NAFTA Chapter 

11 and reduced the 

award by $1 million. In 

2004, the Mexican federal government’s effort 

to hold the involved 

state government financially responsible for 

the award failed in the 

Mexican Supreme 

Court. 

Karpa v. Mexico 

Feb. 16, 1998* 

Apr. 7, 1999** 

ICSID $50 million Karpa 

win, $1.5 

million 

U.S. cigarette exporter 

challenged denial of export tax rebate by Mexican government. 

December 2002: Tribunal rejected an expropriation claim, but 

upheld a claim of discrimination after the 

Mexican government 

failed to provide evidence that the firm was 

being treated similarly 

to Mexican firms in 

‘‘like circumstances.’’ 

December 2003: Canadian judge dismissed 

Mexico’s effort to set 

aside award. 

ADM/Tate & Lyle v. 

Mexico 

Oct. 14, 2003* 

Aug. 4, 2004** 

ICSID $100 million ADM win, 

$33.5 million 

U.S. company producing 

high fructose corn syrup 

sought compensation 

against Mexican government for imposition of a 

tax on beverages made 

with HFCS, but not 

Mexican cane sugar. 

Mexico argued that the 

tax was legitimate because the U.S. had 

failed to open its market sufficiently to Mexican cane sugar exports 

under NAFTA. 


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19 ICSID, Decision on hearing of Respondent’s objection to competence and jurisdiction, The 

Loewen Group, Inc. and Raymond L. Loewen v. United States of America, Jan. 5, 2001, Case 

No. ARB(AF)/98/3. 

CASES IN WHICH INVESTORS OBTAINED PAYMENT FOR CHALLENGES 

OF PUBLIC–INTEREST AND OTHER LAWS—Continued 

Corporation or 

Investor v. Country Venue Damages Sought 

Status of 

Case Issue 

November 2007: 

NAFTA tribunal ruled 

that the HFSC tax was 

discriminatory and a 

NAFTA-illegal performance requirement, but 

did not find it was an 

expropriation. This 

issue was also litigated 

in the WTO, which 

issued a ruling against 

Mexico and in favor of 

the U.S. in 2006. 

Corn Products 

International v. 

Mexico 

Jan. 28, 2003* 

Oct. 21, 2003** 

ICSID $325 million Corn 

Products 

win, 

amount 

pending 

U.S. company producing 

high fructose corn syrup 

(HFCS), a soft drink 

sweetener, sought compensation from Mexican 

government for imposition of a tax on beverages sweetened with 

HFCS, but not Mexican 

cane sugar. 

April 2009: January 

2008 award finally become public. Tribunal 

ruled for CPI on the 

merits then began a 

monetary damages assessment. Panel dismissed most claims but 

found that Mexico violated the national treatment rule by ‘‘fail[ing] 

to accord CPI, and its 

investment, treatment 

no less favourable than 

that it accorded to its 

own investors in like 

circumstances, namely 

the Mexican sugar producers who were competing for the market in 

sweeteners for soft 

drinks.’’ 

CASES IN WHICH THE U.S. ‘‘DODGED THE BULLET’’ ON PROCEDURAL 

GROUNDS 

There have been four cases against the United States that have made it to arbitration; these were dismissed on largely procedural grounds. 

1. Loewen case: In 1998, a Canadian funeral conglomerate, Loewen, used 

NAFTA’s investor-state system to challenge Mississippi’s rules of civil procedure and 

the amount of a jury award related to a case in which a Mississippi firm had sued 

Loewen in a private contract dispute in state court. A World Bank tribunal issued 

a chilling ruling in this NAFTA case, finding for Loewen on the merits.19 The ruling 


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20 UNCITRAL, ‘‘Notice of Arbitration Under the Arbitration Rules of the United Nations Commission on International Trade Law and the North American Free Trade Agreement between 

Grand River Enterprises Six Nations, Ltd. et al. and Government of the United States of America,’’ March 11, 2004a. Available at: http://www.state.gov/documents/organization/30961.pdf. 

21 UNCITRAL, Notice of Arbitration Under the Arbitration Rules of the United Nations Commission on International Trade Law and the North American Free Trade Agreement, Glamis 

Gold Ltd. v. the Government of the United States, Dec. 9, 2003. 

made clear that few domestic court decisions are immune to a rehearing in a 

NAFTA investor-state tribunal. However, the tribunal dismissed the case before the 

penalty phase thanks to a remarkable fluke: lawyers involved with the firm’s bankruptcy proceedings reincorporated Loewen as a U.S. firm, thus destroying its ability 

to obtain compensation as a ‘‘foreign’’ investor. 

2. Mondev case: In 1999, a Canadian real estate developer challenged Massachusetts Supreme Court ruling regarding local government sovereign immunity and 

land-use policy. In October 2002, the claim was dismissed on procedural grounds. 

The tribunal found that the majority of Mondev’s claims, including its expropriation 

claim, were time-barred because the dispute on which the claim was based predated 

NAFTA. 

3. Methanex: In 1999, a Canadian corporation that produced methanol, a component chemical of the gasoline additive MTBE, challenged California phase-out of the 

additive, which was contaminating drinking water sources around the state. In August 2005, the claim was dismissed on procedural grounds. The tribunal ruled that 

it had no jurisdiction to determine Methanex’s claims because California’s MTBE 

ban did not have a sufficient connection to the firm’s methanol production to qualify 

Methanex for protection under NAFTA’s investment chapter. Tribunal orders 

Methanex to pay U.S. $3 million in legal fees. The tribunal permitted NGOs to submit amici briefs and Methanex allowed hearings to be open to the public. 

4. ADF: In 2000, a Canadian steel contractor challenged U.S. Buy America law 

related to a Virginia highway construction contract. In January 2003, the claim dismissed on procedural grounds. The tribunal found that the basis of the claim constituted ‘‘government procurement’’ and therefore was not covered under NAFTA Article 1108. Starting with CAFTA, FTA investment chapters have included foreigninvestor protections for aspects of government procurement activities. 

PENDING CASES AGAINST UNITED STATES CLOSEST TO COMPLETION 

The United States may well dodge the bullet on procedural grounds again. While 

there has been no final action on the Glamis case, for instance, this case involving 

a mining company may not result in an award against the United States: Glamis 

may not be considered a foreign investor, because the company had claimed it was 

‘‘a U.S. citizen’’ in order to take advantage of an 1872 mining law, which allows only 

U.S. citizens or domestically-incorporated firms to exploit federal lands. Also, there 

was also no evidence of losses. Glamis was never forbidden to mine on its claim. 

Rather, it was required to meet the same backfilling rules that such mines must 

meet in California. Glamis could have complied with the law and worked its claim. 

Alternatively, given that Glamis Gold’s mining claims are more valuable with gold 

at $800 an ounce (as it has been recently) than when the case started (gold was 

$325), Glamis could have sold its valuable mining rights, but instead launched an 

investor-state claim. More detail on this and other pending cases is provided below. 

1. Aspects of the state tobacco settlements, which have resulted in a dramatic 

drop in the rate of teenage smoking in the United States, are being challenged by 

Canadian tobacco traders.20 Grand River Enterprises, is the Canadian company 

seeking $340 million in damages over 1998 U.S. Tobacco Settlement, which requires 

tobacco companies to contribute to state escrow funds to help defray medical costs 

of smokers. 

2. A Canadian mining firm is bringing a NAFTA suit over a California law that 

requires reclamation of open-pit, cyanide heap-leach mining sites.21 Glamis Gold, 

the Canadian company is seeking $50 million in compensation for the California law 

requiring backfilling and restoration of open-pit mines near Native American sacred 

sites. The company’s American subsidiary had acquired federal mining claims and 

was in the process of acquiring approval from state and Federal Governments to 

open an open-pit cyanide heap leach mine. When backfilling and restoration regulations were issued by California, Glamis filed a NAFTA claim rather than proceed 

with its application in compliance with the regulations. 

3. A Canadian drug company is suing the United States under NAFTA because 

it was not clearly granted the right to manufacture a generic version of a Pfizer 


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22 UNCITRAL, Notice of Arbitration Under the Arbitration Rules of the United Nations Commission on International Trade Law and the North American Free Trade Agreement, APOTEX, 

Inc. v. the Government of the United States, Dec. 10, 2008. 23See Luke Engan, ‘‘Mexican Truckers File NAFTA Investor Claim; DOT Gives Proposal To 

NSC,’’ Inside U.S. Trade, April 10, 2009. See also, Canacar v. the United States of America, 

filed April 2, 2009, p. 6. 24For instance, the European Commission issues an annual list of U.S. regulatory policies at 

the federal, state and local levels that they consider trade barriers. On this list are many state 

policies with historical antecedents long preceding the WTO, such as state regulation of insurance and alcohol control states. A high-level forum called the Transatlantic Economic Council 

has also been developed to discuss the elimination of such ‘‘trade barriers’’ on both sides of the 

Atlantic. For the 2007 list of U.S. trade barriers see http://ec.europa.eu/trade/issues/sectoral/ 

mk_access/pr150207_en.htm. 

drug by the U.S. court system.22 Apotex is a Canadian generic drug manufacturer 

sought to develop a generic version of the Pfizer drug Zoloft (sertraline) when the 

Pfizer patent expired in 2006. Due to legal uncertainty surrounding the patent, the 

firm sought a declaratory judgment in U.S. District Court for the Southern District 

of New York to clarify the patent issues and give it the ‘‘patent certainty’’ to be eligible for final FDA approval of its product upon the expiration of the Pfizer patent. 

The court declined to resolve Apotex’s claim and dismissed the case in 2004, and 

this decision was upheld by the federal circuit court in 2005. In 2006, the case was 

denied a writ of certiorari by the U.S. Supreme Court. Because the courts declined 

to clarify the muddled patent situation, another generic competitor got a head-start 

in producing the drug. Apotex challenged all three court decisions as a 

misapplication of U.S. law, NAFTA expropriation, discrimination and a violation of 

its NAFTA rights to a ‘‘minimum standard of treatment.’’ They are demanding $8 

million in compensation. 

4. Most recently, a consortium of Mexico-domiciled trucking groups is initiating 

a NAFTA Chapter 11 case over the ending of the NAFTA trucks pilot program, they 

may be seeking billions in damages, even though very few trucks from Mexico are 

likely to meet U.S. standards, be appropriate for very long international hauling, 

and even though very few such trucks participated in the recent Bush administration cross-border trucking program beyond the border zone. The claimants say because they pay certification fees they have an investment.23

After an initial wave of WTO cases and NAFTA investor-state challenges, enforcement of NAFTA and WTO non-trade policy constraints has gotten more subtle. 

Given that trade attacks on health and environmental laws draw terrible press and 

controversy and are expensive to litigate, foreign governments and investors have 

found that merely threatening challenges to chill initiatives rather than waiting for 

their passage and then formally filing against them is a cheaper and politically safer 

tactic.24 For instance, after NAFTA threats were raised against a Canadian provincial proposal to institute a single-payer form of auto insurance, the proposal was 

dropped. Often these cases never come to public attention unless one party leaks 

the documents. Thus, while there is not a long list of formal WTO or NAFTA cases 

against U.S. state policies, increasingly state officials have been facing trade agreement threats against state policy initiatives. Moreover, the formal cases that have 

been launched are illustrative of the threats that the NAFTA–WTO model poses to 

normal state governmental activity and legislative prerogatives. 

f 

Statement of the U.S. Chamber of Commerce 

The U.S. Chamber of Commerce is the world’s largest business federation, representing more than three million businesses and organizations of every size, sector, 

and region. 

More than 96 percent of the Chamber’s members are small businesses with 100 

or fewer employees, 70 percent of which have 10 or fewer employees. Yet, virtually 

all of the nation’s largest companies are also active members. We are particularly 

cognizant of the problems of smaller businesses, as well as issues facing the business community at large. 

Besides representing a cross-section of the American business community in terms 

of number of employees, the Chamber represents a wide management spectrum by 

type of business and location. Each major classification of American business—manufacturing, retailing, services, construction, wholesaling, and finance—is represented. Also, the Chamber has substantial membership in all 50 states. 

The Chamber’s international reach is substantial as well. It believes that global 

interdependence provides an opportunity, not a threat. In addition to the U.S. 


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1 Unless otherwise noted, all statistics on investment are from the Bureau of Economic Analysis, U.S. Department of Commerce. 2 Raymond J. Mataloni, Jr., ‘‘U.S. Multinational Companies—Operations in 2006,’’ Bureau of 

Economic Analysis, U.S. Department of Commerce, November 2008. 3 Ibid. 

4 Ibid. 

Chamber of Commerce’s 112 American Chambers of Commerce abroad, an increasing number of members are engaged in the export and import of both goods and 

services and have ongoing investment activities. The Chamber favors strengthened 

international competitiveness and opposes artificial U.S. and foreign barriers to 

international business. 

Positions on national issues are developed by a cross-section of Chamber members 

serving on committees, subcommittees, and task forces. More than 1,000 business 

people participate in this process. 

In the 21st century, investment capital moves across national borders as never 

before. For the average citizen trying to follow who owns what—or which companies 

are buying or merging with others—the flow of international investment has caused 

confusion and uncertainty. However, the facts show that no one country or region 

is ‘‘buying’’ another. Rather, Americans derive great value on both sides of the investment equation. 

The U.S. Chamber of Commerce is a preeminent defender of international investment. With scores of policy experts and lobbyists on staff, the Chamber works to 

defend America’s traditional openness to international investment and to protect the 

investments U.S. firms make in other countries. 

Investment from Abroad 

Over the years, the United States has become one of the world’s principal destinations for foreign direct investment (FDI). By 2007, the total stock of FDI in the 

United States totaled $2.1 trillion.1

Investments by foreign companies in our country have created more than 5.3 mil- lion American jobs with an annual total payroll of more than $350 billion. These 

numbers do not include the millions of people who work for companies that supply 

parts and materials to foreign-owned firms. 

In 2007, U.S. subsidiaries of companies headquartered abroad reinvested nearly $70 billion in their U.S. operations. These foreign companies have invested heavily 

in the U.S. manufacturing sector, and foreign-headquartered manufacturers account 

for about a fifth of all U.S. exports of manufactured goods. It’s impressive to note 

that U.S. affiliates of foreign companies spent $34 billion on research and development and $160 billion on plants and equipment in 2007. 

Coupled with home-grown capital and ingenuity, these investments give the 

United States extraordinary access to cutting-edge technology and productivity 

tools. More than 90% of total assets owned by foreign companies are from firms 

based in the developed countries that are members of the Organization for Economic 

Cooperation and Development (OECD). 

U.S. Investment Abroad 

Americans also derive important benefits from U.S. investment abroad. The primary means by which U.S. firms deliver goods and services to foreign customers is 

by investing abroad and creating a foreign affiliate. Many workers hired by American companies abroad work for these affiliates as they service local markets. 

All told, these affiliates generate substantial earnings for American companies. Their sales totaled $4.7 trillion in 2006 2—a sum more than triple the export earn- ings of U.S. companies ($1.4 trillion in 2006). These earnings provide American companies with a growing pool of capital to help their companies grow, innovate, and 

create better jobs at home. 

A common myth is that overseas hiring by U.S. corporations is all about finding 

cheap labor. While the search for affordable labor drives some investment decisions, 

70% of U.S. direct investment abroad is concentrated in highly developed countries. 

Europe—a region not known for low wages—is home to more than one-half of all 

U.S. direct investment overseas.3

Even with significant investments overseas, about 70% of U.S. business investment (including employment and capital expenditures) occurs right here in the 

United States—not in other countries. About 85% of all research and development 

by U.S. multinationals is conducted in the United States.4

Some foreign workers are hired to produce low-cost goods that are shipped back 

to value-conscious American consumers. However, in developing economies, U.S. factories and facilities often stand out as models and contribute to raising local labor 

and environmental standards. Workers at these facilities routinely make more than 


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5 U.S. Department of State. 

6 Daniel S. Sullivan, Assistant Secretary for Economic and Business Affairs, U.S. Department of State, written testimony before the Senate Committee on Foreign Relations, Washington, D.C., June 12, 2006: http://montevideo.usembassy.gov/usaweb/paginas/2006/06- 

245aEN.shtml. 7This language was included in the text of the four free trade agreements mentioned. 

they ever had the opportunity to earn in the past. U.S. companies active in the developing world are major contributors to social and charitable initiatives. 

With lower-value products being produced overseas, Americans can focus on high 

technology, high-value manufactured products, and a broad range of professional 

and business services. In other words, America’s position in the global economy 

helps us create and preserve high-skill, high-wage jobs. 

Securing U.S. Investment Abroad 

The U.S. Chamber is committed to ensuring strong protection of U.S. investments 

overseas. The rule of law, sanctity of contracts, and respect for property rights are 

the touchstones of respect for international investment, and the United States 

should fight for these principles in markets around the globe. 

One critical mechanism for extending protections to U.S. investors overseas and 

improving their access to foreign markets is the U.S. bilateral investment treaty 

(BIT) program. This program has enjoyed bipartisan support throughout its existence. Over the past quarter century, the United States has concluded BITs with 47 

countries, and similar provisions to protect investments are included in bilateral 

and regional free trade agreements (FTAs).5 Over time, U.S. BITs have evolved to 

offer a high standard of protection for investors, as seen in the current U.S. ‘‘model 

BIT.’’ 

The BIT program has had the same basic objectives since it was launched in 1982: 

‘‘protecting United States investment abroad; encouraging the adoption of marketoriented investment policies that treat private investment in an open, transparent, 

and nondiscriminatory way; and supporting the development of international legal 

standards consistent with these policies.’’ 6

Bilateral investment treaties provide a level playing field for investors by advancing the principle of ‘‘national treatment.’’ Embraced by Democratic and Republican 

Administrations for more than two decades, this principle gives U.S. investors overseas the same rights, privileges, and responsibilities as domestic investors with limited exceptions (e.g., for national security). 

Respect for the principle of national treatment is critical to job-creating investments and efficient global capital markets. The Chamber and its members believe 

the principle of national treatment should not be compromised directly or indirectly 

in ways that would create advantages or disadvantages for companies based on 

whether they are headquartered in the United States or elsewhere. 

Investor-State Arbitration 

In addition, the ‘‘investor-State’’ dispute settlement procedures established in 

BITs and FTAs provide for arbitral panels to resolve disputes under international 

legal standards. These proceedings mirror U.S. Constitutional protections against 

arbitrary government actions and against taking of property without compensation. 

In developing countries where local judiciaries are at times slow, ineffective, or corrupt, U.S. companies have benefited significantly from recourse to ‘‘investor-State’’ 

arbitration. 

Investor-State arbitration is rarely employed. For example, a total of just over 30 

cases was brought under NAFTA’s Chapter 11 in all three countries over the first 

ten years after the agreement’s entry into force. The value of the investments involved in these cases is small compared to the hundreds of billions of dollars that 

U.S. companies have invested in countries with which the United States has BITs 

or FTAs. However, even when arbitration is not used, these provisions serve as a 

positive admonition to governments to avoid arbitrary actions in commercial disputes lest the case wind up before an international arbitration panel. 

In recent years, some critics of the BIT program have expressed concern that 

these provisions somehow grant foreign enterprises rights not given to U.S. companies. While the merits of that debate could be repeated, the bottom line is that policymakers have definitively taken this issue off the table. In 2007, the U.S. free 

trade agreements with Colombia, Panama, Peru, and South Korea were amended 

to clarify that ‘‘foreign investors are not hereby accorded greater substantive rights 

with respect to investment protections than domestic investors under domestic law 

where, as in the United States, protections of investor rights under domestic law 

equal or exceed those set forth in this Agreement.’’ 7


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8 U.S. Chamber of Commerce, Policy Declarations (approved by the Board of Directors). 

9 Ibid. 

The Path Forward 

Looking forward, the U.S. Chamber strongly supports negotiating BITs with 

China, India, and Vietnam, and, when circumstances permit, with additional large 

economies such as Brazil and Russia. As other countries around the globe pursue 

their own BITs, decision-makers in Washington should be wary of how these may 

place U.S. companies at a competitive disadvantage should the United States lag 

in its own negotiations. In addition, where countries are not yet ready for a fullscale BIT, the United States should continue to help interested partners to build 

their own capacity to protect investments through Trade and Investment Framework Agreements (TIFAs), which help prepare countries for BIT negotiations. 

In addition, it is noteworthy that the State Department’s Advisory Committee on 

International Economic Policy (ACIEP) is preparing a task force to review the current ‘‘model BIT’’ mentioned above. As the United States considers negotiating BITs 

with additional countries with different economic structures, negotiators will have 

to take the particularities of local circumstances into consideration. 

For instance, U.S. Chamber policy has long acknowledged that ‘‘governments 

often assist their firms through such means as mixed credits, co-financing, export 

credit subsidies and investment promotion to obtain and retain business in foreign 

markets and to capture portions of the United States market. These practices persist despite the efforts of the U.S. government to eliminate or control them through 

multilateral agreements and through other initiatives to convince foreign governments to cease their noncompetitive practices.’’ 8 Chamber policy is to support collaboration between the U.S. government and business in framing international economic policy—including investment policy—especially ‘‘where foreign governments 

interfere with natural market forces, the consequence of which is to put American 

firms at a significant competitive disadvantage.’’ 9 This position will continue to inform our advocacy relating to BITs and FTAs in the future. 

Conclusion 

Respect for international investment is a pivotal issue for the business environment—at home and abroad. For more than five million Americans, our openness to 

foreign capital means a good job. For millions more, it means economic growth, new 

sales, and enhanced competitiveness. 

As U.S. companies invest around the world, ensuring respect for their investments is just as critical. As former Secretary of State Colin Powell said, ‘‘Capital 

is a coward; money flees uncertainty and corruption. To entice capital in and then 

keep it in, governments must recognize private property rights, deeds of trust, and 

the sanctity of contract, and they must enforce these rights transparently and fairly.’’ 

The principles of the rule of law, sanctity of contracts, and respect for property 

rights are at the heart of U.S. international economic policy. Their protection should 

always be at the fore of policymakers’ concerns, even in countries where formal investment protection agreements remain a distant goal. The U.S. Chamber of Commerce is committed to working with Congress to ensure that investment treaties 

and free trade agreements help to advance these principles. 

Æ 


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