Foreign Policy in Focus (FPIF) Policy Report
Peru, Colombia Trade Deals Would Lock in More Bad Investment Rules
Sarah Anderson and Sara Grusky | December 18, 2006
Editor: Emily Schwartz Greco, IPS
With both houses of the U.S. Congress now under Democratic control, the Bush Administration faces an even more difficult battle to obtain approval of stalled free trade agreements with Colombia and Peru. Shortly after their November election victory, key Democrats in the U.S. House of Representatives sent a letter to the U.S. Trade Representative requesting that both deals be re-negotiated.
However, the letter focused narrowly on concerns over worker rights. “We are dismayed that the administration has consistently declined to take the simple steps necessary to address our key outstanding concern, which continues to be labor standards,” wrote Rep. Charles Rangel (D-NY) and other leading Democrats.
While the labor issue is indeed a critical matter, merely inserting a labor clause would not be enough to address the growing backlash against the U.S. government’s approach to free trade—both here and abroad. A total overhaul is needed.
Based on the model of the 1994 North American Free Trade Agreement, the U.S. trade agenda is designed to increase the profits of large corporations by restricting governments’ authority to ensure that trade and investment benefit the broader society. As a result, countries that sign on can expect more pressure on workers to accept poorer working conditions, more damaging natural resource exploitation, more small farmers displaced by competition with agribusiness giants, and more power for pharmaceutical companies to limit access to generic drugs.
Special Scrutiny Needed
The investment rules in the Colombia and Peru pacts deserve special scrutiny. They grant protections for private foreign investors that are virtually identical to those in NAFTA, CAFTA and myriad bilateral investment treaties signed over the past two decades. And yet these countries are being pulled on board at a time of a dramatic awakening about these rules’ potential for harm. Elected officials—from California state legislators to Argentine President Nestor Kirchner—are attacking them as a threat to sovereignty. Developing country governments, with strong support from civil society organizations, have managed to block U.S. efforts to impose such rules through the World Trade Organization. In 2004, Australia became the first country to reject key elements of the U.S. investor protection agenda in the negotiation of a bilateral free trade agreement.
As the backlash against these investor protections grows, the Bush Administration is counting on the Colombian and Peru deals to keep some momentum going on their side.
Lessons Not Learned
Some of the investment rules the U.S. government is promoting actually make the International Monetary Fund (IMF) look progressive. These rules would ban the types of capital controls which helped some countries escape the worst of the global financial crisis of the late-1990s. Malaysia and Chile, for example, emerged relatively unscathed, thanks to effective use of such controls, while their neighbors suffered the devastating consequences of billions of dollars in rapid capital flight. Former World Bank Chief Economist Joseph Stiglitz has stated that the lack of restrictions on capital flows was the "single most important factor" leading to the crisis.
Since then, the IMF has stopped demanding that governments lift controls on capital flows. The dinosaurs in the U.S. Trade Representative’s office, however, continue to use deals like the Colombia and Peru trade pacts to strip governments of this practical tool for protecting their people from the volatility of the financial system.
Governments that accept these rules surrender other economic development tools as well, such as requirements that foreign investors use a certain percentage of local inputs in production or transfer technology. And perhaps most disturbing, these governments are severely restricted in their authority to carry out "indirect expropriation," interpreted as any action that diminishes the value of a foreign investment, including the adoption of environmental and public health regulations.
The Power of Investor Lawsuits
Investors can pursue compensation for violations of any of the rights spelled out in these agreements through an "investor-state" dispute settlement process. This allows them to bypass domestic courts and sue governments directly through international tribunals. Under NAFTA, more than two dozen such suits, demanding billions of dollars in compensation, have been filed against the United States, Mexico and Canada. Globally, the body that handles most investor-state cases is the International Center for the Settlement of Investment Disputes (ICSID), housed by the World Bank. Currently, it has more than 100 pending cases targeting about 40 countries.
Colombia and Peru are among only a handful of Latin American countries not yet bound by an investor protection agreement with the United States. Costa Rica may be tied in soon through a trade agreement that has been signed but not yet ratified. This leaves Brazil, Paraguay, and Venezuela as the only others in the region without either a trade pact or a bilateral investment treaty with the United States.
Once ratified, these agreements are like straightjackets. In the case of the U.S. deals with Peru and Colombia, either government technically could get out with six months notice. In reality, such trade pacts are extremely difficult to back out of, both politically and economically, because they cover almost every aspect of an economy. The narrower bilateral investment treaties typically require the protections to remain in force for 10-15 years after a government gives notice that it wants to withdraw.
It is no wonder that Bolivian President Evo Morales told the BBC he feels like a "prisoner" in the presidential palace because of such rules. Previous Bolivian governments signed a flurry of bilateral investment treaties, including one with the United States in 1998. Thus, while Morales campaigned on the promise of increasing the Bolivian people’s share of revenues from natural resource exploitation, actions to fulfill these promises could provoke a wave of expensive lawsuits from foreign mining and gas companies.
Bolivians are well aware of the dangers of investor-state lawsuits after the notorious "Water War" case. In 2000, residents of Cochabamba rose up in protest against sky-high water rates imposed by U.S.-based Bechtel Corporation and other members of a consortium that had privatized the city’s water system. After abandoning the contract, the consortium turned around and sued the Bolivian government for some $50 million in compensation. An international activist campaign pushed Bechtel to settle the suit for a token sum shortly before Morales took office. However, by that time the cash-strapped Bolivian government had spent about $1 million in legal fees during four years of arbitration.
Argentina to Suffer
Argentina is poised to suffer mightily from these unfair investment rules. Thirty-four cases, about a third of all pending ICSID cases, target Argentina. ICSID arbitrator Felix Peña estimates that if the investors won all these claims, the bill for Argentine taxpayers could be as high as $15 billion. This would exacerbate the Argentine debt crisis, line the pockets of multinational corporations, and deprive Argentine citizens of much needed investment in public services such as schools, clinics, roads, and potable water.
How did this situation come to pass? During the 1990s, Argentina signed more than 51 bilateral investment treaties with both developed and developing countries—more than any other Latin American country. These treaties cinched in the legal straitjacket that enabled this stream of investor lawsuits. Then, after the Argentine financial crisis struck in late 2001, the government adopted a range of emergency measures designed, in part, to protect citizens from skyrocketing inflation. Foreign investors argued that these measures cut into their profits and sought legal recourse. Leading the charge were global water, gas and electricity companies such as Enron, Exxon Mobil, Suez, and AES Corporation that had arrived during Argentina’s privatization wave in the 1990s.
Thus far, ICSID tribunals have ruled against Argentina in two cases related to its crisis response policies, most recently in a case brought by Louisville-based energy company LG&E over demands that the company reduce prices charged to consumers for natural gas. In addition, an ICSID tribunal awarded $165.2 million to Enron’s water subsidiary, Azurix, in July of this year for actions taken by Buenos Aires provincial regulators prior to the financial crisis. Although the award was less than Azurix had demanded, it is extremely controversial given that the company’s customers had to boil their tap water during an uncontrolled algae outbreak in 2000.
In both Bolivia and Argentina, activists and some officials are questioning the constitutionality of the investor-state lawsuits. In Bolivia, critics are lobbying the Constitutional Assembly, which is currently working to rewrite the country’s constitution, to make it explicit that foreign investors must obey national laws and use national tribunals to resolve disputes. A review by Argentina’s constitutional court is also considered likely.
However, even if domestic courts rule that investor-state lawsuits violate national constitutions, investors would likely argue that the international treaties are still binding and pursue retaliatory actions if governments refuse to pay up. While their avenues of recourse are legally murky, some experts have suggested that investors could lobby their home governments to take the matter to the International Court of Justice at The Hague or even to seize the offending governments’ assets.
U.S. Government Response
In promoting their investor protection agenda, U.S. officials emphasize the benefits for U.S. investors abroad. They also claim (albeit without much evidence) that such rules help developing countries attract more foreign investment. What they tend to downplay is the fact that these agreements also give investors of other countries unprecedented powers in the United States. Thus, it was a real eye-opener in 1999 when Canada-based Methanex used NAFTA’s investment rules to sue the U.S. government for nearly $1 billion over a California public health regulation. The case was eventually dismissed, but for six years it tied up U.S. officials in an arbitration process that sent a chilling message to other lawmakers. The Methanex case and others targeting U.S. laws have prompted many organizations representing subfederal officials to oppose these rules, including the National Conference of State Legislators and the National League of Cities.
The Bush Administration has responded to the criticism by making a few concessions, but only in the area of transparency. For example, recently negotiated trade agreements require tribunals to allow "friend of the court" submissions and to make most hearings open to the public. They have made no changes to limit investors’ powers to undermine state and local sovereignty.
Government officials around the world are waking up to the fact that the investor protections promoted by the U.S. government are among the most extreme examples of excessive corporate power. In an era of deregulation and privatization, they are one more potent weapon for undermining the role of government in supporting social and environmental goals.
The fact that the Bush Administration had to negotiate bilateral deals with relatively small economies like Peru and Colombia is a reflection of the failure of their trade agenda for the hemisphere. The original plan was a Free Trade Area of the Americas that would include 34 countries. But that grand initiative appears be to dead after several years in intensive care, due to opposition from many of the region’s bigger economies, namely Brazil, Argentina, and Venezuela.
Rather than pushing ahead with a failed agenda, the White House and Congress should consider the many alternative approaches to trade and investment policies developed by civil society organizations and some governments. For example, the Bolivian government is circulating guidelines for a "fair and productive cooperation treaty with the United States" that welcome international trade and investment, as long as it does not undermine the national government’s authority to pursue its own development strategies. The plan differs from the U.S. trade model in many ways. For example, it would allow the Bolivian government to guarantee access to affordable general medicines, ban the patenting of plants and animals, and maintain programs that favor local producers. With regard to investment, it would preserve the right to require foreign investors to transfer technologies and use local inputs and labor. Not surprisingly, it rejects investor-state dispute settlement and instead would require foreign investors to resolve disputes through national mechanisms.
The Bolivian proposal reflects many of the demands of civil society critics of free trade, although these have often gone beyond an emphasis on national sovereignty to include calls for the inclusion of some international standards. Since national governments come and go, citizens can gain some protection against the vagaries of political power by requiring governments that sign trade pacts to uphold basic internationally recognized labor rights and respect multilateral environmental agreements.
A little tinkering with already negotiated trade deals is not enough. Congress would do well to open up a genuine dialogue—across borders, parties, and sectors—to forge a better, more equitable and sustainable path towards economic integration.
Sarah Anderson directs the Global Economy Project at the Institute for Policy Studies. Sara Grusky is Latin American Program Coordinator at Food and Water Watch. They are contributors to Foreign Policy In Focus.
Published by Foreign Policy In Focus (FPIF), a joint project of the International Relations Center (IRC, online at www.irc-online.org) and the Institute for Policy Studies (IPS, online at www.ips-dc.org).