US Coalition of Service Industries
COALITION OF SERVICE INDUSTRIES STATEMENT ON THE DRAFT MODEL BILATERAL INVESTMENT TREATY
The Administration has drafted a Model Bilateral Investment Treaty (BIT) for use in negotiating such treaties with potential BIT partners. The model BIT was last updated ten years ago, and the new model under development is intended to reflect the investment policy guidance and negotiating objectives of the Trade Promotion Act of 2002. The interagency team responsible for drafting this document held a number of consultations with interested private sector representatives during November and December of 2003 to discuss the content of the BIT and seek industry input. The Administration hopes to finalize the text of the Model BIT early in 2004, at which point it will begin a process of consultation with the Senate to seek the support of that body for the use of the Model as a basis upon which to negotiate BITs.
The Model BIT is of great interest to the services industry. Most U.S. services trade takes place via “Mode 3,” the commercial presence of an investor in the country in which it is selling services. The sales of services by the foreign affiliates of U.S. companies in 2001 totaled $432 billion (well in excess of U.S. crossborder exports of services of $276 billion the same year). These direct investments by U.S. services companies in the markets in which they are selling are one of the principal ways by which U.S. industry competes in global markets.
Services industry concerns
In the course of consultations with services industries on the Model BIT, a number of serious concerns have been raised. Several of these issues are of particular concern to the services sector. These are explained in detail below, and relate to (1) the prospective nature of the Model BIT; (2) the breadth of the BIT’s prudential carve-out; (3) the limitations on recourse to investor-state dispute settlement mechanisms in certain cases; and, (4) the dispute settlement process itself.
The Model BIT is prospective in nature.
The protections afforded in the Model will apply only to new investments moving forward, not to investments already in place in a country at the time that the Treaty is adopted. This leaves billions of dollars in direct investments by U.S. companies exposed, and is a sharp departure from the practice of previous BITs, in which the new protections were applied to pre-existing investments.
Our understanding is that the U.S. Government’s unwillingness to extend the coverage of the Model to preexisting investments stems from its concern that it could, itself, face litigation from foreign investors in the U.S. Since the U.S. has already entered into numerous agreements that cover pre-existing investments, it is hard to understand the U.S. Government’s new-found concerns.
Breadth of the prudential carve-out in the Model BIT.
We do not challenge the Government’s view that a prudential carve-out is necessary for a host country to protect the interests of its investors, depositors, policyholders, etc. However, it is the breadth of the carve-out in the proposed Model BIT that is at issue. The language in the Model BIT (Article 20, Paragraph 1) is very similar to that in the GATS. However, because BITs deal with investment issues in more detail, we believe the carve-out could be safely narrowed by ensuring that exceptions for prudential reasons include only those measures genuinely related to the soundness of financial institutions. This would be a much more effective and balanced way to deal with the Government’s concerns.
Limitations on investor-state dispute settlement for MFN/NT claims by financial firms.
The Model provides that the investor-state dispute settlement mechanism will not be available to claims relating to national treatment or most-favored nation treatment by financial firms. Such claims could only be resolved through the state-to-state arbitration mechanism.
We understand that this has to do with U.S. regulators’ concern about potential legal exposure based on their own treatment of foreign financial institutions.
The exclusion of MFN and national treatment claims from the investor-state dispute settlement process is detrimental to the interests of the financial services sector, and the Model BIT should be changed to allow access to investor-state arbitration on such claims by financial firms. This type of broad exception is not even necessary since even the more limited prudential carve-out we have suggested is adequate protection against any unreasonable claims.
The concerns of U.S. regulators could also be addressed by separate reservations to clarify that MFN and national treatment obligations are not breached by regulatory decisions that take into account the extent and quality of home-country regulation.
Cumbersome dispute settlement process.
The dispute settlement process envisioned in the Model BIT is lengthy and onerous, and should be streamlined. The time frames involved need to be shortened, and should be made consistent with those found in the investment chapters of the Singapore or Chile free trade agreements.
Under the proposed Model, a respondent has 120 days from the time a claim is brought by an investor to invoke the prudential exception in defense of a measure it has taken. If, within 180 days of the submission of the claim, competent financial authorities of both countries determine that the prudential exception claim is a valid defense, the claim is dismissed; if they do not agree, the claim can then go to a special state-to-state arbitral tribunal. If that tribunal agrees that the prudential exception claim is a valid defense, again, the claim is dismissed. Otherwise, it then proceeds to investor-state arbitration.
The process is protracted. In particular, the 120 and 180 day periods to determine whether a measure properly falls within the prudential carve-out are significantly longer than those provided for in recent FTAs, such as that with Chile.