Investment Rules in Trade Agreements

Korea-U.S. FTA and Beyond

July 19, 2010Sarah Anderson, Institute for Policy Studies

sarah@ips-dc.org

Rules in Korea-US FTA investment chapter are similar to those in existing US agreements with 52 nations.

40 of these are bilateral investment treaties.

Others are FTAs, such as NAFTA, CAFTA, etc…

KORUS would expand an old model

Provide private foreign investors sweeping protections against many types of government actions that might reduce the value of their investment.

Allow foreign investors to bypass domestic courts and sue governments in international tribunals.

What Do These Investment Rules Do?

They do not give tribunals the power to repeal a law or regulation.

However, they can force a government to pay massive compensation to the investor.

These potential high costs can put a “chilling effect” on responsible policymaking.

What Do They Not Do?

Some Controversial Cases

Philip Morris v. Uruguay

The tobacco giant is suing over cigarette packaging restrictions.

Their claim: limits on space for branding unfairly infringes on intellectual property rights.

Using CAFTA to sue El Salvador over the denial of gold mining permits.

A diverse civil society coalition had persuaded the government to block the projects, on environmental grounds.

Pacific Rim and Commerce Grp.

US chemical company sued over a ban on a gasoline additive that was a suspected neurotoxin.

Canadian government reversed the ban and paid the company $13 million.

Ethyl v. Canada

Canadian companies sued under NAFTA against California environmental protections.

Both cases dismissed, but after years of legal proceedings. In Glamis, US government had to pay for 1/3 of arbitration costs and its own legal defense.

Methanex and Glamis v. US

Pushed a risky oil derivatives deal on Sri Lanka that blew up in 2009, costing $800 million.

While contract fraud charges were being investigated, Sri Lanka suspended payments. The banks sued.

Deutsche Bank and Citibank v. Sri Lanka

$ $

$ $

Two international oil companies are suing Algeria over a windfall profits tax on oil.

The United States applied a similar oil tax between 1980 and 1988.

Maersk Oil and Anadarko v. Algeria

Arguments in Support of Current Rules

Argument #1:

“As we grow investment abroad, we increase U.S. exports and create

higher-paying jobs here in the United States.”

 

The foreign investment boom has actually coincided with a steady decline in U.S. manufacturing jobs.

1990 1992 1994 1996 1998 2000 2002 2004 2006

$89,469

$304,114

17,69514,155

Income from US FDI, in millions, adjusted for 2006 $U.S. Manufactur-ing employment, millions

Sources: U.S. Bureau of Economic Analysis and U.S. Bureau of Labor Statistics

“Weaker standards of investment protection will hurt our trade partners’ ability to attract the additional foreign investment and

strengthen the rule of law that are crucial to their growth.”

 

Argument #2:

Countries with U.S. investment agreements are no more likely to attract foreign investment.

Foreign investment does not automatically translate into good jobs; it often displaces domestic investment.

Bypassing domestic judicial systems is not the way to strengthen them.

Argument #3:

“US government hasn’t lost any cases yet, so they probably

never will.”

Strong defense lawyers (may not always be the case)

Canada the only major capital exporter among investment agreement partners (likely to change)

Tribunals reluctant to rule against the superpower for fear of fueling reform efforts

Luck of the draw. Arbitrators issue contradictory rulings

Possible Explanations for US No-loss Record:

“With regards to provisions in several FTAs that give foreign investors the right to sue governments directly in foreign tribunals, I will ensure that foreign investor rights are strictly limited and will fully exempt any law or regulation written to protect public safety or promote the public interest. And I will never agree to granting foreign investors any rights in the U.S. greater than those of Americans.”

- President Barack Obama

Important Moment for Fresh Approach to Investment Rules