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Concern grows over global trade regulation

Financial Times

Concern grows over global trade regulation

By Alan Beattie

12 March 2008

Amid the noisy battering the North American Free Trade Agreement (Nafta) is taking from both Democratic presidential hopefuls, one recent statement from Hillary Clinton was particularly resonant. "We will have a very clear view of how we’re going to review Nafta," the New York senator said. "We’re going to take out the ability of foreign companies to sue us because of what we do to protect our workers."

The treaties and tribunals that regulate international investment have become both more powerful and more controversial as global trade becomes less about goods flowing across borders and more about multinationals siting abroad. Concern is growing not only among US presidential candidates but also among emerging market governments and development campaigners.

There are now nearly 3000 bilateral investment treaties (BITs) between countries worldwide, designed to prevent foreign-owned companies from discrimination, arbitrary nationalisation or other unfair treatment by the host country government.

The tribunals that settle disputes between investors and authorities are generally modelled on ad hoc commercial arbitration panels rather than public courts. The International Centre for the Settlement of Investment Disputes (ICSID), one of the world’s most prominent arbitration panels, operates out of the World Bank in Washington (see sidebar).

Argentina has been hit by dozens of arbitration cases since its financial crisis in 2001-2002, when Buenos Aires forcibly changed contracts from dollars into pesos and froze utility prices to cushion the impact on Argentine consumers. Foreign companies including Mobil, France Telecom and Vivendi have won a string of rulings against Argentina at ICSID, awarding them hundreds of millions of dollars in compensation for lost earnings.

But Argentina has so far declined to pay any of the awards, and has argued that the financial crisis was an emergency that gave it permission under international law to breach contracts.

ICSID is also embroiled in a controversy involving Bolivia, which last year became the first country to announce its withdrawal from ICSID’s jurisdiction. Bolivia lost a prominent case to Bechtel, the US engineering and construction company, after cancelling a water supply contract. It has argued that the tribunal should ignore cases filed after Bolivia gave the foreign investors notice to withdraw.

Meanwhile, Exxon Mobil is claiming billions of dollars compensation from Venezuela at ICSID after walking away from an oil project following government attempts to take control.

Development campaigners say the tribunals violate national sovereignty. A recent petition from 863 campaign groups including Friends of the Earth and the Sierra Club called on ICSID to stop hearing cases against Bolivia. Sarah Anderson of the left-leaning Institute for Policy Studies said: "The global petition reflects growing concerns around the world about a system of investor rights that undermines democracy and human rights".

And as Mrs Clinton suggested, even the White House and Congress were surprised and disturbed when the US ended up being on the end of several high-profile claims under Nafta. With companies from emerging markets like India and China investing abroad, the rich countries could find themselves increasingly targeted by litigation.

Nonetheless, the system of international investment arbitration continues to expand its reach. European and American business lobbies, often dominated by service sector companies like telecommunications, retailers and banks that invest abroad, are keen on new investment treaties and on adding investment rules to broader trade deals.

The US is currently pursuing BITs with the "BRICs" (Brazil, Russia, India and China) group of emerging market countries. A US trade official says that Washington’s model for BITs deals with some of the problems encountered under Nafta by including rules against frivolous claims, along with consolidation procedures allowing multiple claims to be considered simultaneously rather than clog up the system. But the official adds: "It is inconceivable to think that we would sign a [BIT] without provisions for investor-state litigation".

That aspect may prove a sticking point for some. Brazil, Latin America’s largest recipient of foreign direct investment, has traditionally been suspicious about investment treaties. A senior Brazilian foreign ministry official said recently that the Argentine example was "very politically visible" and that it would be enormously difficult to get investor-state arbitration through the country’s congress. One Washington trade lawyer says: "The US business community clearly still likes BITs. But why Brazil or any other country would agree to sign one after looking at Argentina defeats me."

Argentina case shows panel’s flaws

Arbitration panels such as the International Centre for the Settlement of Investment Disputes (ICSID) aim to operate quietly - critics would say secretively - and quickly.

An ad hoc arbitration panel convened from practising lawyers rather than a regularly sitting court with permanent judges, ICSID has a review committee with limited powers rather than a formal appeals process.

Such a committee recently looked at one of ICSID’s rulings against Argentina - a $133m award to CMS, a US energy company - and concluded that, while the original panel had made "manifest errors of law", it lacked the power to overturn the judgment.

Luke Peterson, editor of Investment Treaty News, a widely-read briefing service, says: "Such a curious outcome has infuriated Argentina, at the same time as it has stoked debate amongst observers as to whether [ICSID] needs an overhaul - including perhaps an appeals court with greater powers to correct any mistakes."

The involvement of governments in the rulings raises the political stakes, particularly for a country such as Argentina in which politicians have repeatedly blamed foreign investors and institutions such as the International Monetary Fund for the country’s periodic crises. A Washington trade lawyer says: "When the [ICSID] challenge committee says that a decision is flawed but still has to be enforced, they essentially make it politically impossible for the government of Argentina to pay".

But for many lawyers, introducing an appeals procedure would defeat the whole object - to provide swift and binding decisions without recourse to sometimes slow, biased or corrupt national court systems.