Bilateral Treaties to Promote and Protect Foreign Investment within the Americas: an alternative to the FTAA

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ArgenPress, 28/06/2005

Special Reports

Bilateral Treaties to Promote and Protect Foreign Investment within the Americas: an alternative to the FTAA.

By: Nana Bevillaqua (IDISCO – INFOMORENO – AMERICA XXI)*

Freely translated by Anoosha Boralessa. Neither www.bilaterals.org nor any other organization or individual has reviewed this translation.

“The light of a poet’s soul are its contradictions”
— Frederico Garcia Lorca
“The WTO proposes to unify and harmonize the rules relating to the management of domestic markets and the global market, in the name of free trade, a radical concept history has never heard before (…). This is why I think that the WTO is really the G7’s Ministry of Colonies. This institution performs the same function for all states at the periphery: it prevents colonies from transforming into competitors and prevents States from exercising their right to legislate and to regulate the activity of the capital that operates in their territory.”
— Samir Amin

1. The Geopolitical Framework for Bilateral Treaties for the Promotion and Protection of Foreign Investment

The new configuration of the global order has managed to internationalize relationships of production on the basis of transnational economic groups that administer the flow of capital, goods and technology. This naturally promotes the trend to broaden international norms relating to the treatment and protection of foreign investment. This strictly corresponds to the need to centralize capital and profit against economic factors. There is a greater willingness to establish a general regime promoting foreign investment. Such was the aim of Multilateral Agreement of Investment (MAI) promoted by the Organization for Economic Cooperation and Development (OECD). This project was derailed in 1998 due to criticisms from developed countries, especially France. The basis for these criticisms is that states are creating international organizations to which they are delegating too much legislative and adjudicative powers. A specific target of criticism was the delegation of judicial sovereignty to the International Centre for the Settlement of Investment Disputes (ICSID) and to foreign investors in the international law-making process. ICSID depends on the World Bank.

From January 2005, the FTAA, a product of the US hegemon, could not implement a free trade zone for the Americas, by displacing bilateral agreements, the basis of the power relationships on the continent. Such agreements have been concluded between our countries and effectively guarantee the political, technological and military leadership of North America, not only in the region but also in relation to other dominant groupings in a phase of a transicion contradictorio, leading towards the establishment of a Global State and capital planning out of its structures.

Within this framework, bilateral treaties achieve the aim of establishing general rules on foreign investment. This enables the transfer of profits generated in our economies to the consolidated sector of the economy where capitalism resists contradictions in its last stage of historic evolution. It does so at the expense of widespread poverty, the erosion of general conditions for development and results in mankind’s irreversible regression.

2. Latin America and the Foreign Investment Protection Regime

During the 1990s, Latin American countries apart from Brazil, ratified Bilateral Investment Treaties for the Promotion and Protection of Foreign Investment. They did so to provide legal security for investors from the other State [party]. For reasons that will be explained later on, the willingness of the parties to provide fair and equitable treatment (judged according to the national standard) to foreign capital, acquired the trappings of a regime of privileges. This regime held out a guarantee that foreign capital was inviolable and gave assurances regarding the host state’s regulatory policies on the conditions for foreign investment activity. Immunizing foreign investment from regulation means derogating from the legislative powers of the nation state both when the state is in state of emergency and when it is not. Promoting a minimum standard of treatment or just and equitable treatment as a norm of international law is to devalue the essence of international law. It grants a foreign investor the option (that it is likely to seize) of displacing the host state’s laws with a unilateral regime of investment protection. Under this regime, an investor has the right to have recourse to an international arbitral tribunal that gives primacy to the regime providing unilateral protection for foreign investment.

The central purpose of shielding foreign investment from the general effects that follow when a State implements its economic policy and grants investors the freedom to define relationships of production at a global level, free from local market requirements is expressly contained in stabilization clauses. Stabilization clauses require the host state to undertake not to change the law without paying compensation. Art 3 of the Bilateral Promotion and Protection Treaty for Foreign Investment concluded between the Republic of Argentina and Panama provides:

“Neither Contracting Party shall take directly or indirectly measures of expropriation or nationalization or any other similar measure including amending or derogating from laws which have the same effect against investments that are found on its territory and which belong to an investor of the other Contracting Party,
Unless such measures are taken for a public purpose or in the public interest;
Are defined in the legislation of the Host State
Are taken on a non-discriminatory basis
And comply with rules of due process
The measures will be accompanied by provision for prompt, adequate and effective compensation.

This formula inverts a principle that has governed the conduct of modern States, namely: public authorities can apply legal policies to reasonably modify any right. But BITs transform this general regulatory power into a prohibition. This prohibition imposes the onus on States to demonstrate to a foreign tribunal that the purpose of its policies are rationally connected to its domestic order. This prohibition also facilitates reaching a radical position: that the responsibility of a state is engaged even though no real damage has been inflicted other than that which follows from reasonably balancing the interests of the whole society.

Art IV of the Argentine – US BIT provides:

“Investments shall not be expropriated or nationalized directly or indirectly by the application of measures tantamount to expropriations or nationalizations unless it is:
For reasons of public utility
By the payment of prompt, adequate and effective compensation in a non-discriminatory manner
In accordance with the due process and the general principles of treatment ...”

The consequences are: more arbitral rulings on the effects of government action that merely modifies domestic legislation. In this context, a foreign arbitral tribunal can justify a broad interpretation of its jurisdiction given that the simple act of modifying national legislation establishes a prima facie case for the unlawful treatment of foreign investment.

The Concept of Investment, Indirect Expropriation, Total by-passing of the national courts in favor of international arbitral tribunals and making it lawful for a foreign investor to make a claim against a Host State.

The substantive aspect is related to others of the same nature. These define BITs as a regime providing unilateral protection to foreign investment against other national rights and guarantees. Among these aspects are highlighted:
the concept of investment
indirect expropriation,
the right for businesses, their shareholders and former shareholders to make claims directly against States
the absolute exclusion of courts in favor of foreign tribunals
the unlimited transfer of investments and profits, these terms being broadly interpreted and
the entry of foreign personnel in relation to the exploitation of the foreign investment.

Under the France-Argentina BIT, foreign investors can opt to bring a direct action against a foreign state before an ICSID tribunal without having to [first] exhaust local remedies. This was the aim of ICSID. The effects have been broadened in the case of Maffezini, Emilio Augustin v. Kingdom of Spain Case no ARB/97/7. The case established that in contrast to [the regime applicable to local investors], in the case of disputes between a foreign investor and a Host State, the applicable legal regime gives primacy to the BIT. Both the public and private legal orders of the Host State are subordinate to it. This type of agreement is infrequently used to govern relationships between developed countries even though a greater volume of investments flows between them.

The definition of investment protected under a BIT is so open-textured that it expands the [very] concept of investment. The definition of investment includes assets, and covers shares and other forms of participation in companies, rights derived from any type of contribution of economic value, moveable and immoveable goods, real property rights, the full range of intellectual property rights, contractual rights relating to issues relating to public services etc. The concept of investor is linked to business profits. The latter is given a high degree of protection through the concept of indirect expropriation. Expanding the concept in this way has allowed ICSID to confer a right of action on: minority shareholders or those that neither control the local company nor participate indirectly through a company controlled. The sole requirement is ownership or direct/indirect control.
Authority:
CMS Gas Transmission Co. v. Republic of Argentina, case no ARB/01/08;
Mondev v. United States, NAFTA;
Lanco Inc v. Argentine Republic, Case No Arb/97/6;
Aguas del Aconquija SA and Vivendi v. Argentina Case No Arb/97/3.

The general principle that tends to be enshrined in international law through BITs and NAFTA is that the owner of the investment has the right to bring a direct action against the Host State. The only requirement is that the foreign investment:
must be located in the state of residence; and
must be the property of or directly or indirectly controlled by a national of one of the Parties.

ICSID arbitral tribunals interpreting the system of bilateral treaties recognize that shareholders are the “true investors.” Goetz v. Burundi. ICSID tribunals grant them locus standi even if they are the minority shareholders or where the parent company that has renegotiated the contract with the Host state, as is the case of Argentina.

As for indirect expropriation a concept that lacks legal precision, it extends to unilaterally protecting the foreign investor’s expectation of profits against host state measures that discriminate against or treat the foreign investor unfairly. This, together with the largely inflated concept of foreign investment, reflects how one-sided the BIT regime is: it transforms foreign investment into an absolute value which is therefore anti-democratic and contrary to the Rule of Law.

As for BITS, they provide that an investor has the right to submit disputes relating to investments in the host state to an international arbitral tribunal. The parties mutually agree to submit the dispute to arbitration administered under the Treaty on Investment Dispute Settlement between States and Nationals of other States, the so-called Washington Convention 1965; or to an ad hoc tribunal established under the rules of the United Nations Commission for International Trade Law (UNCITRAL). ICSID is an independent arbitral system that imposes an obligation on states to confer arbitral awards the same status they would grant to final judgments. Because an arbitral award is automatically enforceable, the award is not subject to the process of conversion into an enforceable order. This leads us to the situation we are in today where local courts are completely by-passed in favor of a foreign arbitral tribunal.

3. The Case of Argentina and the Power Relations in America

As an example and a warning, it must be recalled that following its 1994 constitutional reform, the Argentine Republic granted treaties (that are not only binding rules of international law but also provide unilateral protection to foreign investment) a superior rank to national law. This means that the host state has given up its power to legislate on matters of foreign investment and its direct and indirect consequences. Part of the Congreso de la Nacion’s law-making powers on foreign investment matters is subordinate to the preferred regime that protects foreign investment and contributes to defining the relationships of production set up by the capitalist hegemon at the global level. It upsets the general legal order when a superior rule of international law merges with a national law within a pyramid of norms, when this new order does not regulate a superstate comprising nations at similar stages in their development. Instead, it regulates a bilateral relationship, [formed] by the merger or clash of two disparate structures; a relationship that can be characterized by the imposition of power by one party on the other.

In contrast to this, the North American US Congress, through the prescriptions of the US Trade Act 2002 declares that US domestic law is the supreme law on foreign investment. This law guarantees that investors from third states shall not be granted greater rights than those conferred on American citizens in the US. As far as the delegation of legislative sovereignty is concerned, we see that foreign investors seek to exercise critical control in the international law-making process. This is stated in UNCTAD documentation, Series On Issues of International Investment Agreements, Lessons from MAI (Multilateral Investment Treaty).

Regarding the US – Argentina BIT, this has two additional provisions that curtail the host state’s powers even more than the treaties Argentina has signed with European countries. First, the Argentina-US BIT contains national treatment clause and a most-favored nation clause that operates from the time the investment is admitted, robbing the Argentine State of the right to make a decision on the participation of foreign investment in its domestic order in accordance with categories or restrictions established under national law. In other words, the application of the national treatment clause at the admission phase in the investment process displaces the host state’s national legislation. What is more, the most favored nation clause extends the guarantee of national treatment at the admission stage to all other treaties. This clause standardizes the legal basis of those aspects of treaties that are the most favorable to the investor independently of the specific investment protection treaty. This guarantee to arrogate the benefit granted to an investor of the other State under the BIT, has also been applied by ICSID to the procedural aspects of arbitration. By doing so, it moulds arbitration into an expansive system, referring exclusively to its one-sided terms (Maffezini).

Lastly, the clause on capital requirements appears only in the treaty signed with the US at art II point 5. It prevents the host state from imposing conditions on foreign investment activity or from regulating its relationship with its parent company. In this way the host state cannot apply measures that will directly encourage national development. Such measures would be laws to buy national or regulate the conduct of capital flows or remittance of profits, technology transfers or the goals of unemployment.

Latin America has returned to opening its veins. This time not to support initial accumulation of capital but to oppose its organic crisis in the final stage of its historical evolution; when it gave up subsuming el trabajo a su valorizacion to directly deny man the importance of his own existence. This is the reason identical realities replicate, like images in a prism of the region. These include the standardization of these treaties across South America (with the exception of Brazil), Acts of Extending Preferential Trade with the Andean countries (Bolivia, Peru, Colombia and Ecuador), the Free Trade Treaty between the US and Central America (FTA US – CA) or NAFTA to which Mexico is a party. These agreements reproduce NAFTA’s Investment Chapter 11 under the framework of bilateral and regional agreements. The latter goes much further than the General Agreement on Tariffs and Trade in increasing investor rights and limiting government power to administer their national authorities.

There are differences in economic development between countries undergoing a genuine process of inter-state integration. There are different ways states interact with the international order. An example is the US that gives primacy to its domestic law over treaty rights and engages in war instead of injecting legitimacy into its policies. These matters demand an exhaustive analysis of new rules of general application on which the justice of international law and the integration of nations shall rest. This shall be the stage of the real destruction of the old nation states but under conditions that restrain the social force of labor, man’s creativity and dreams that conceptualize a life of humanity, freeing it from its more acute contradictions.

Taking into account that even the regime on the nullity of treaties set out in the Vienna Convention promotes the validity of international law over national law and restricts nullity to the formal aspects of the competence to conclude treaties, the duty to ensure that a bilateral treaty is consistent with the domestic constitutional order falls on the nation states. This means that sovereign states are the original right bearers. They have to denounce these treaties or their most arbitrary clauses following the procedures provided, in accordance with the legal principles of democratic constitutions; to recover their legislative and jurisdictional powers, by retrieving their inherent jurisdiction which had been delegated to international foreign tribunals, allowing them to rule on the general regulatory or contractual policies of independent nations.

*Nana Bevillaqua is a Doctor in Law and Lic in Sociology, University of Buenos Aires. She acts as the Deputy of the Movement for the Recovery of a Directed National Energy Policy (MORENO).

source: Argenpress