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Clash on Investment

As Washington debates financial regulations, corporations are fighting for the right to sue over government actions—including health, environment, and other public interest regulations—that diminish the value of an investment.
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GM factory in San Luis Potosi

Mexican president Felipe Calderón visits a new General Motors plant in the state of San Luis Potosí in August, 2009. In the 1990s, following protests by residents, the governor of the state prohibited a hazardous waste treatment plant operated by California-based Metalclad Corporation from re-opening, and eventually declared the site part of an ecological protection zone. Metalclad filed a claim under NAFTA, and the Mexican government was fined 16.7 million dollars.

Photo by Alfredo Guerrero, Gobierno Federal.

 

During the past several months, I spent nearly 30 hours in meetings of a private sector committee tasked with advising the Obama administration on a particular set of international economic policies.

My seat at the table was one of many signs of the new opportunities for advocates of progressive change in Washington. At the same time, my experience was an up-close-and-personal look at how hard corporate lobbyists are fighting to make sure nothing changes.

The committee was made up of about 30 people, with one-third from labor, environmental, and other public interest groups and nearly all the rest representing global corporations, including Citigroup, ExxonMobil, and Procter and Gamble, as well as the major corporate lobby groups.

Our assignment was to review the U.S. approach to bilateral investment treaties (BITs), deals that are nearly identical to the investment chapters of our trade agreements. The topic may sound obscure. But for all those many hours, we grappled with what I see as the critical question of our time: What is the proper role of government in our economy?

Investor Protections

Even before uncontrolled corporate greed drove the global economy off a cliff, civil society groups around the world had pointed to so-called "international investor protections" as dangerous tools in a deregulatory agenda.

In a nutshell, these rules give private foreign investors the right to bypass domestic courts and sue governments directly in international tribunals. The most controversial is the right to sue over government actions—including health, environment, and other public interest regulations—that diminish the value of an investment.

For example, Mexico had to pay off a U.S. company that had been denied local permission to build a hazardous waste facility in an environmentally sensitive area. Canada repealed a public health law in the face of a threatened lawsuit by a U.S. chemical company. The U.S. government has spent millions of dollars defending itself against claims over legitimate environmental regulations.

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A growing number of international cases demonstrates how these rules threaten democracy and the public interest. Even more disturbing are the hidden costs. We'll never know how many times governments have decided to not take actions in the public interest—for fear of provoking an expensive investor lawsuit.

On the campaign trail, President Obama committed to changing these rules, stating "With regards to provisions in several free trade agreements 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."

The economic crisis has added even more urgency. Beyond their overall deregulatory thrust, these investment agreements specifically prohibit certain policies designed to mitigate or prevent financial crisis. Surely, I thought, the time had come for some serous rethinking. The advisory committee seemed to present just such an opportunity.

Corporate Pushback

The corporate representatives on the advisory committee didn't quite see it that way. Instead, as the final report to the Obama administration reveals, they fought back hard against nearly every proposal to increase policy flexibility. In fact, in several areas, they pushed to further curtail regulatory powers. Their favorite argument was that if U.S. investment deals were to allow governments more policy space, U.S. corporations would be at a disadvantage relative to foreign competitors. By that logic, the regulatory race to the bottom would never end.

There was a modicum of consensus on a few narrow issues. For example, in light of concerns over a new debt crisis in the poorest countries, we were all able to agree that the administration should at least take a look at the potential danger of international investors using these treaties to undermine debt restructuring programs.

But the page numbers alone reflect the high degree of polarization. The main body of the report is dwarfed by the annexes, where committee members were allowed to express their views unedited.

I worked with eight others to submit a joint set of recommendations for a dramatic overhaul of the rules that govern international investment. While it was a shame that we weren't able to find much common ground with the corporate representatives, this annex demonstrates how much was learned.

Key Recommendations

We made four major recommendations: dispute settlement should be consistent with the public interest; foreign investors should not have greater rights than U.S. investors; our investment agreements should protect health, safety, and the environment as well as promote good jobs; and such agreements should help mitigate and prevent financial crises.

More specifically, we argued that the current "investor-state" process should be replaced with a "state-state" process. Since these cases often concern matters of broad social impact, they should be handled by governments representing the public interest. This is the position supported by the more than 125 members of the House of Representatives who have endorsed a pending bill in Congress called the TRADE Act (HR 3012). The U.S.-Australia free trade agreement also uses a state-state process.

We also made several recommendations to fix the fuzzy language that some tribunals have interpreted in ways that go beyond the investor rights under U.S. law (and most likely the laws in other countries). For example, these rules give investors the right to so-called "fair and equitable" treatment. These are subjective terms with no clear legal meaning.

Similarly fuzzy language applies to the treaty's impact on the environment and workers' rights. For example, the U.S. model bilateral investment treaty says governments shall "strive to ensure" to protect the environment and worker rights. I might strive to be seven feet tall or to never eat another potato chip, but neither of those aspirations is very serious.

Finally, current rules restrict governments from placing even temporary controls on capital flows, despite the fact that many countries have used this policy tool effectively in crisis situations. We also recommended fixes for vague language that could open the door to investor-state cases over other financial regulatory reforms.

What Next?

Our report will be part of an internal, interagency process coordinated by the State Department to produce a new model bilateral investment treaty. Then the Obama administration will need to figure out what to do about BIT negotiations begun by the Bush administration with China and India. The corporate lobby is pushing hard for new deals based on the current model, particularly with China.

Of course, those of us who devoted much of our summer vacations to the advisory committee are hopeful that our work will have broader repercussions as well. Candidate Obama promised to revisit some existing trade pacts, and the BIT advisory report should inform any review of the investment chapters of U.S. trade agreements. Moreover, several governments that already have a BIT with the United States would be eager to renegotiate those pacts. Particularly in South America, policymakers are increasingly challenging these rules as a threat to sovereignty.

The Institute for Policy Studies has partnered with the Bolivia-based Democracy Center to help better link the U.S. debate with those in other countries. We have just launched a bilingual (English-Spanish) website as a tool for activists, policymakers, and academics working to build a more just and democratic system for governing global investment.

The fact that the Obama administration, early in its term, launched a process to gather civil society input into our bilateral investment treaties was a huge positive step toward the broad-based debate we need about our whole approach to international economic policy. Let's hope it's just a first step and not the last step in the process.


Sarah Anderson author picSarah Anderson directs the Global Economy Project at the Institute for Policy Studies and served on the Investment Subcommittee of the State Department's Advisory Committee on International Economic Policy. This article was originally published by Foreign Policy in Focus.

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