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Analysis: Sleeping Beauty And Prince Charming: Bilateral Deals Are No Fairytale

ZNet Commentary

June 13, 2003

Sleeping Beauty And Prince Charming: Bilateral Deals Are No Fairytale

By Aziz Choudry

The recent explosion of bilateral investment and trade agreements and investor-state disputes is of growing concern. Many mobilisations against the World Trade Organisation (WTO) aim to stop attempts by industrialised countries to kickstart talks on a multilateral investment agreement at September’s Cancun Ministerial meeting. But strategies to confront neoliberal globalisation must integrate action on these lower-profile agreements, and acknowledge how they are being used by governments and corporations for their economic and geopolitical aims. They attract little attention and scrutiny, eclipsed as they are by regional and global negotiations. Yet they are being used as leverage in multilateral negotiations, to get faster, deeper free trade and investment commitments than is possible in a divided WTO.

WTO negotiations are grinding slowly. Many member governments - especially from the global South - oppose any resurrection of the Multilateral Agreement on Investment (MAI) at the WTO. But expanding the liberalization agenda through bilateral agreements is a stealthy step-by-step approach which could prepare a multiple launchpad for more comprehensive multilateral agreements. Once countries are enmeshed in webs of bilateral investment agreements, it will be harder to resist an MAI-type agreement at the WTO.

Chapter 11, NAFTA’s powerful investment chapter provides foreign corporations with rights to sue governments for enacting public policies or laws which they claim to affect their profitability. Too bad if they protect the environment, health and safety, support local small businesses or jobs. Many bilateral free trade and investment agreements contain similar provisions as well as “national treatment” clauses which state that foreign companies and investors must be treated no less favourably than local companies and investors. Before this can be expanded to bind 34 countries under the Free Trade Area of the Americas (FTAA), countries are being sued under obscure bilateral investment treaties (BITs). Transnational water giant Bechtel is currently suing Bolivia under a 1992 Holland-Bolivia BIT for loss of profits after the reversal of Cochabamba’s water privatization following a popular uprising.

William D. Rogers of Washington, DC law firm Arnold and Potter argues that investment treaties are “an open invitation to unhappy investors, tempted to complain that a financial or business failure was due to improper regulation, misguided macroeconomic policy or discriminatory treatment by the host government and delighted by the opportunity to threaten the national government with a tedious expensive arbitration” (speech to Inter-American Development Bank Conference, October 26-27, 2000).

NAFTA dispute horror stories such as the Ethyl Corp.- Canada case were vital in campaigning against the ill-fated OECD MAI. “It seems the high-profile disputes under the NAFTA appear to have inspired many litigators to dust off the NAFTA’s more obscure predecessors,” writes Luke Eric Peterson (Changing Investment Litigation, Bit by BIT, Bridges Between Trade and Sustainable Development 5, No. 4, May 2001), commenting on the recent upsurge in investor-state disputes under bilateral agreements. In many bilateral agreements where a dispute cannot be settled amicably and procedures for settlement have not been agreed within a specified period, it can be referred to a body like the World Bank’s private arbitration body for investment disputes, the International Centre for Settlement of Investment Disputes (ICSID) or the UN Commission on International Trade Law (UNCITRAL). NAFTA lets unhappy investors choose between the two. Either way, they represent the privatisation of commercial justice.

Founded in 1966, over half of ICSID’s cases were filed in the past six years, mainly under investment treaties. Today, there are some 2000 BITs. UNCTAD describes them as “the most important protection of international foreign.investment” to date.

“In a way...bilateral and multilateral investment treaties are to ICSID what Prince Charming was to Sleeping Beauty, having stirred the activities of the Centre,” ICSID lawyer Eloïse Obadia told the Swiss Arbitration Association Conference on Investment Treaties and Arbitration in Zurich in January 2002.

“During the first 30 years of its existence, ICSID was somewhat of a “Sleeping Beauty,” with an average of one or two cases being registered each year. It is with the widespread development of bilateral and multilateral investment treaties that the activities of ICSID have awakened”, she said.

Unless you are a successful corporate claimant, investor-state disputes are no fairytale.

Pakistan currently faces three investor-state dispute claims pending at ICSID totalling around US$ 1 billion. Swiss company SGS, whose board of directors includes former WTO Director-General Mike Moore, is claiming $120 million from Pakistan for premature termination of a contract to provide pre-shipment inspection services, an alleged breach of a 1996 Switzerland-Pakistan BIT. An ICSID panel met in Paris in February to consider the case but reserved its judgement.

Italian construction firm Impregilo, which headed the consortium to build the controversial Ghazi Barotha dam, part of a major hydroelectric project, wants $450 million. Using a Pakistan-Italy BIT, Impregilo claims Pakistan’s Water and Power Development Authority (WAPDA) seriously breached its contractual commitments. Turkish company Bayinder filed a similar-sized claim over termination of its motorway construction contract. Like many other BITs, the definitions of “investment” and other terms in the agreements which Pakistan signed are very broad and afford investors ample opportunity to claim against a frighteningly wide range of actions or omissions by the government and its agencies.

This March, an UNCITRAL tribunal awarded $353 million to Central European Media (CME) in its dispute with the Czech Republic under a Netherlands-Czech Republic BIT. CME claimed that the Czech Republic’s Media Council had deprived it of its stake in TV Nova, a Prague English language TV station. It claimed that the government failed to ensure CME fair and equitable treatment, and failed to accord full protection and security to CME’s investment, and that its acts constituted measures tantamount to expropriation of its investment. The Czech Republic faces other disputes. Saluka Investments, a Dutch subsidiary of Japanese banking corporation Nomura has filed an arbitration claim seeking over $1 billion, claiming discriminatory treatment relating to its investment in the privatised IPB Bank which collapsed in 2000. Several other disgruntled foreign companies announced their intention to file international cases against the Czech government following the CME ruling.

Domestic courts can be sidestepped by investors’ recourse to international arbitration panels. ICSID and UNCITRAL only allow for the investor and government parties to the dispute to have legal standing. The public has no right to listen to proceedings or view evidence or submissions. Both bodies require only minimal disclosure of the names of the parties and a brief indication of the subject matter. That makes such disputes very difficult to track, let alone mobilise around. There is little incentive for investors to settle disputes amicably given the highly favourable outcomes for corporations which have initiated proceedings under such agreements.

Who will pay these massive costs? International business law firms which specialize in such cases are laughing all the way to the bank. The Czech Republic spent an estimated $10 million in legal fees alone over the CME dispute. Although the government is appealing the ruling, some officials propose to hike value-added tax on goods and services so that all taxpayers would absorb the costs. Regardless of how ICSID rules, these cases will cost Pakistan millions of dollars. Ordinary people will shoulder these costs which will increase their indebtedness to international financial institutions, while compliance will be linked to future foreign aid commitments and loans.

Alongside this proliferation of BITs, many bilateral free trade agreements (FTAs) contain similar investment provisions, besides expansive coverage of sectors like services, intellectual property, government procurement, and agriculture. Many of these provisions go well beyond WTO commitments.

With “fast track” Trade Promotion Authority under its belt, the Bush Administration is aggressively pursuing bilateral trade and investment agreements. It wants to stitch up bilateral and regional deals just as the EU has been doing, to secure greater access and control for US companies.

“Just as modern business markets rely on the integration of networks, we need a web of mutually reinforcing regional and bilateral trade agreements to meet diverse commercial, economic, developmental and political challenges”, said Robert Zoellick, US Trade Representative, in his March 2003 “Overview and the 2003 Agenda”. “They also promote the broader U.S. trade agenda by serving as models, breaking new negotiating ground, and setting high standards....”

Early this month, the US and Chile signed an FTA. A similar deal with Singapore has already been signed. FTAs with Morocco and Australia are in the pipeline.

The Bush administration is “rewarding” countries like Singapore, Morocco and Australia for support in the “war on terror” by negotiating bilateral FTAs. Some believe that the US-Chile FTA signing was delayed over Washington’s displeasure at Santiago’s lack of support on Iraq. In New Zealand last month, opposition MPs and business leaders crowed that Helen Clark’s criticism of the invasion of Iraq had cost the country an FTA with the US - though Zoellick’s statements indicated it had more to do with objections from the powerful US farming lobby.

While an FTA with a “moderate” Muslim country like Morocco offers much political capital for the USA, US corporations are open about their own capitalistic interests. The US-Morocco FTA Coalition, comprising US corporations and pro-free trade organisations, wants to lock in Morocco’s economic reforms and get access to Morocco’s markets, including its telecommunications, tourism, energy, entertainment, transport, financial services and insurance sectors. It wants a tighter Moroccan intellectual property regime, and better market access for US agribusiness.

In FTA negotiations with Australia, the US seeks the removal of all restrictions on investment like Australia’s Foreign Investment Review Board and limits on foreign investment in airlines, media and telecommunications. US negotiators, urged on by American pharmaceutical industries, want to get rid of Canberra’s Pharmaceutical Benefits Scheme which sets price controls for many prescription medicines. US drug companies want more profits from higher pricing and full market access for their products. These are some of the “rewards” for John Howard’s loyal support for the US war on Iraq!

The US-Chile FTA aims to add momentum to FTAA negotiations and counter growing opposition from a number of governments and social movements to the proposed agreement.

The Chile and Singapore FTAs with the US have “NAFTA-plus” broad definitions of investment which throw the door wide open for disgruntled investors to take a case to a dispute tribunal. Intellectual property provisions go even further than the WTO’s TRIPS (Trade-Related aspects of Intellectual Property rights) agreement, severely limiting the grounds for allowing use of compulsory licensing of medicines, and effectively extending the 20-year term of drug company patent monopolies by an additional five years, threatening access to affordable medicines, not least HIV/AIDS drugs.

Both agreements impose alarming new limits on the use of capital controls. Kavaljit Singh, Director of Delhi’s Public Interest Research Centre, argues that Chile’s controls on capital inflows have helped insulate it against financial crises. It “stands to reason that the probability of occurrence of a financial crisis in Chile and Singapore would increase manifold with the removal of capital controls as envisaged in the bilateral trade agreements with the US.“ (Trading Away Capital Controls, Asia-Europe Dialogue, 13/04/03)

Even free traders have slammed this aspect of these FTAs. Jagdish Bhagwati and Daniel Tarullo wrote: “The intention of the Bush administration to use these two agreements as "templates" for other trade agreements, possibly including the Doha round, means that acceptance of the capital control provisions could engender a trade policy that causes far-reaching damage. The prohibition on capital controls has the makings of a US foreign policy debacle. Imagine that a government imposes short-term capital controls in order to manage financial problems. Compensation will ensue, but only for American investors. The citizens of the developing country will then see a rich US corporation or individual being indemnified while everyone else in the country suffers from the crisis. One would be hard-pressed to think of a better prescription for anti-American outrage.” (A Ban On Capital Controls Is A Bad Trade-Off, Financial Times, 17/03/03)

When it comes to bilateral trade and investment agreements, we can’t afford to be Sleeping Beauties. It’s time to get ugly about them.