WAR: TRADE BY OTHER MEANS:
How the US is getting a free trade agreement minus the negotiations
Focus on the Global South
1 July 2004
By Mary Lou Malig *
On June 28, two days before the announced date of handover of power, the United States transferred political authority in Iraq, in a meeting so secret only six people participated.(1) This was the much talked about handover of sovereignty to the Iraqi people that would effectively “end” the occupation of Iraq by the US.
INSTALLING MORE THAN JUST ORDER
Before it handed over “sovereignty” to Iraq, the US has done the humanitarian task of installing peace and order. This they did by issuing orders - called the Coalition Provisional Authority (CPA) Orders or Bremer Orders for short. These orders covered almost everything from de-Baathification of Iraqi society to weapons control to management and use of Iraqi public property to new Iraqi Dinar banknotes. The CPA was impressively efficient in issuing orders compared to the haphazard way they have been repairing basic infrastructure in the country.
A rather harmless looking CPA order number 39 on Foreign Investment was issued as part of this laundry list last September 19, 2003. Not more than six pages long, it disguises its true weight, for it carries with it the same impact of a 100-page free trade agreement andcovers all essential elements of an investment agreement that usually take years for countries to agree upon.
In one swift move, the US installed a market economy geared towards “promoting foreign investment through the protection of the rights and property of foreign investors in Iraq.” (2) These investor rights are not new. In fact its similarity to other investment agreements is a little too uncanny to be coincidental.
INVESTMENT BY ANY OTHER NAME
Order no. 39 was written following a blueprint. It is no accident that it reads exactly like various agreements involving the US - from a proposed treaty to a trilateral agreement to a multilateral agreement. And it is not a sweeping generalization to state that it reads like the Multilateral Agreement on Investment (MAI), the North America Free Trade Agreement (NAFTA), the Free Trade Area of the Americas (FTAA), the General Agreement on Trade in Services (GATS) under the World Trade Organization (WTO) and the Free Trade Agreement between the US and Chile.
There are key areas where all these agreements show coherence, and in most cases, show exact wording. (See Table 1 in PDF format to see exact wording used in these provisions, http://www.focusweb.org/pdf/ml-matr...) Order no. 39 may not have the exact wording, albeit because it is at least a hundred pages shorter than these agreements, but it still says the same thing. It is important to note that these agreements are all different types: the MAI was a proposed treaty between 29 countries on investment but was stopped in 1998 by civil society opposition. The NAFTA is a trilateral agreement between Mexico, Canada and the US on trade and trade related issues. The FTAA is a hemispheric-wide free trade agreement covering 34 countries in North America, Central America, South America and the Caribbean (excluding Cuba). The GATS is an existing agreement under the WTO and the Free Trade Agreement between the US and Chile is a bilateral agreement on trade. The common factor of these agreements, aside from the ubiquitous presence of the US as the main driver in all of them, is their rules on investment. (3)
These agreements are still being fiercely opposed by social movements and people’s organizations around the world because they give disproportionate protection to the investor at the expense of the state and citizens. The MAI, a treaty that was being secretly negotiated in the Organization for Economic Cooperation and Development (OECD) created an uproar when the draft document was leaked in 1998. Civil society opposition was so intense that the OECD was forced to shelve it. The FTAA, called “NAFTA plus” by US negotiators is opposed by a hemispheric wide coalition of social movements, non-governmental organizations, trade unions and activists. Meetings of FTAA negotiators are regularly met by massive. The WTO’s latest Ministerial held in Cancun, Mexico, ended in disarray as protests combined with developing countries’ efforts to stick together effectively blocked negotiations and further agreements.
Order no. 39, which contains all the controversial investment provisions of these hotly contested agreements has, in contrast, had an easy passage: it was simply imposed on the Iraqis before they could even realize what was happening.
The main provisions of Order no. 39 are:
DEFINITION OF INVESTMENT
“Foreign investment means investment by a foreign investor in any kind of asset in Iraq, including tangible and intangible property, and related property rights, shares and other forms of participation in a business entity, and intellectual property rights and technical expertise, except as limited by Section 8 of this Order”
This is a very broad definition of investment. Like in the MAI, the NAFTA, FTAA and US-Chile FTA, investment can cover almost anything from the traditional form of foreign direct investment through to portfolio investment. In the FTAA, it extends this coverage to “to include market share and access to markets, whether or not the investor has a physical presence.” (4) This is dangerous as the agreement affords the same privileges and protection to an investor that brings in capital and contributes to the domestic economy to a fly-by-night portfolio investor that can flee the country at first sight of crisis.
In the US-Chile FTA, it even includes in its definition investors who are intending to invest. This broad scope of investment has been abused, as will be shown later, by corporations under the NAFTA.
“(1) A foreign investor shall be entitled to make foreign investments in Iraq on terms no less favorable than those applicable to an Iraqi investor, unless otherwise provided herein.
(2) The amount of foreign participation in newly formed or existing business entities in Iraq shall not be limited, unless otherwise expressly provided herein.”
National Treatment basically means that a foreign investor will be treated at least as favorably as the domestic investor. This provision has traditionally applied to goods - countries all set tariffs and quotas but once the foreign goods have entered the country, they are treated the same way as local goods.
National Treatment for a foreign investor however, is not so simple. A foreign investor especially in the case of Iraq, carries with it a tremendous amount of capital compared to the domestic investor. In developing countries, governments realize this disparity between big capital and small capital, as represented by local initiatives or entrepreneurs, and have tried to “level the playing field” by providing incentives or benefits to the local producers. Under this national treatment provision, it will no longer be possible to implement such local developmental policies and the government will have to extend the same tax break it would give to an local producer, to a multi-million dollar corporation.
Many governments who have enshrined this policy of building the domestic and national capacity by writing this into their constitutions now have to re-write their laws to adhere to this National Treatment provision. Under NAFTA, national treatment means better treatment for foreign investors as it “establishes new rights applicable only to foreign investors claiming compensation from taxpayers for the costs of complying with the same domestic policies that all domestic companies must follow.” (5) Order no. 39 cuts to the chase and decrees 100 percent ownership of investment by foreigners and national treatment before the Iraqis can write their constitution.
A policy like this will wipe out whatever domestic capacity or investment that still exists in Iraq.
Related to the provision on national treatment is the provision on performance requirements. Performance requirements are measures that governments impose on foreign investors to ensure that the country benefits from the investment. Traditionally, governments have required foreign investors to utilize a certain percentage of domestic content in goods, or technology transfer so as to build the domestic capacity or even just hiring locals. Measures like these aim to help the local economy and to spread the benefits of the investment to the communities.
But because under the National Treatment foreign investors are to be treated like domestic investors, it is “unfair” to impose performance requirements on them unless a government imposes the same requirements on domestic investors. The MAI, NAFTA, FTAA and US-Chile FTA put an absolute ban on performance requirements. And although Order no. 39 does not ban it, one can safely assume it will use the provision on national treatment to ensure no performance requirements are imposed on foreign investors. As it states in Section 2: “This Order specifies the terms and procedures for making foreign investments and is intended to attract new foreign investment to Iraq.”
“Transfer abroad without delay all funds associated with its foreign investment, including:
i) shares or profits and dividends;
ii) proceeds from the sale or other disposition of its foreign investment or a portion thereof;
iii) interest, royalty payments, management fees, other fees and payments made under a contract; and
iv) other transfers approved by the Ministry of Trade;”
Capital controls allow governments to manage exchange and interest rates, and thereby provide some protection against financial crisis. The most vivid example of the absence of capital controls was the Asian economic crisis where the massive flight of capital from the region triggered a domino effect of instability and left the countries in ruin. Countries have shown the effective implementation of capital controls. In Chile, it is called “encaje” and the use of these measures from the period of 1991 to 1998 allowed the country to avoid the financial crises that rocked many of its neighbours. (6)
The US-Chile FTA targets the use of encaje and specifies that its use is to be limited and if it is utilized, Chile must pay compensation to foreign investors. The proposed FTAA does not limit the use of capital controls, but rather bans it: “Article 9 of the draft FTAA Investment Chapter, even more clearly than Article 1109 of NAFTA, would prevent sovereign states from using this type of capital controls.” (7) Order no. 39 repeats this language and bans any kind of capital control on foreign investment. This means that a foreign investor can rake in profits from Iraqis and then send all those profits back to their home country. There is no need to reinvest it in Iraq or to ensure that at least a portion of the profits get recycled into the Iraqi economy.
“Disputes between a foreign investor and an Iraqi investor pertaining to investment in Iraq, or between a foreign investor and an Iraqi legal or natural person, shall be resolved in accordance with the dispute resolution provisions contained in any applicable written agreement governing the relationship between the parties. The parties may elect in any agreement to utilize the arbitration mechanisms outlined in Iraqi law.”
Of all the provisions, dispute settlement is probably the most controversial. The concept of binding, rules based dispute settlement mechanism in trade agreements was introduced in the World Trade Organization. In fact, this is what made it unique. As leading activists have said it, “The WTO is a global trade institution with teeth.” (8) This is because, with the dispute settlement mechanism, the WTO can sanction countries for not following the trade rules. The state-state dispute settlement process of the WTO means that a government can sue another government for actions that can be deemed discriminatory or implementing measures that can be equated as “trade barriers.” once found “guilty” by the dispute settlement body “the losing country has three choices: change its law to conform to the WTO ruling; face harsh, permanent economic sanctions; or pay permanent compensation to the winning country.” (9)
NAFTA on the other hand, goes a step further than the WTO by adding an “investor to state” dispute settlement mechanism. In the WTO, only governments can sue other governments. In the NAFTA however, a foreign corporation can directly sue a government for impeding its right to profit in that country. This provision has been the target of international opposition as it allows foreign investors to challenge democratically written national and domestic policies and even stop in mid-track policies that governments are about to implement. “In the very first NAFTA investor-to-state case ever litigated, which involved US Ethyl Corporation, Canada moved to rescind its environmental and public health measure regulating a gasoline additive developed by Ethyl even before the final NAFTA tribunal ruling in an effort to avoid a large damage reward.” (10)
Canada had good reason to want to avoid a large damage reward. Since the implementation of NAFTA, the total amount of damages claimed by foreign investors has been a total of 13 billion USD - USD1.8 billion from US taxpayers, USD249 million from Mexican taxpayers and a USD11 billion from Canadian taxpayers.” (11)
These disputes are filed, heard and judged in dispute settlement courts outside of national jurisdiction and outside the reach of people. The NAFTA decrees that these disputes be settled by only two courts: the World Bank’s International Center for Settlement of Investment Disputes (ICSID) or the United Nations Commission on International Trade Law (UNCITRAL). The ICSID was used primarily for private disputes between corporations and therefore it made sense that it was not accessible to the public. However, at present, the ICSID is being used to settle disputes that involve corporations and governments and the money used to pay the damages claimed by foreign corporations are the losing country’s taxpayers’ money. The UNCITRAL is even worse as its rulings, like the ICSID’s, are binding but it “does not collect (12) and therefore does not make public even basic information about pending and concluded cases, in fact, the history of cases brought under its rules is not known.” (13) These hearings, both under ICSID and UNCITRAL are closed to the public, have no appeals process and are binding.
This investor to state provision together with the state-to-state dispute settlement provision are present in all these agreements. The authors of Order no. 39 anticipated this need for dispute settlement in the future and covered all bases by specifying that disputes in Iraq pertaining to foreign investment will be settled using whatever arbitration procedures are present in applicable agreements.
It is not only the fact that foreign corporations are given the right to sue governments that is contestable, it is the actual cases they file. All the cases filed under NAFTA and one anticipates in FTAA and other agreements, have used the argument of expropriation. Expropriation has traditionally meant an action of a government that takes away the right of an investor to profit, for example, when a government reclaims the foreign investors’ property to use as a public road. Expropriation, however, under these investment laws has an expanded meaning:
1) Private property not only refers to land and physical assets, but the market-determined commercial value of property, including a company’s asset value and future profit earnings.
2) Traditionally compensation was awarded only when the whole value of property was lost. Under the new definition it applies when any part of its commercial value is lost.
3) It is not only expropriation but acts “tantamount to expropriation” that require compensation. This means that a wide range of government policies, laws or administrative measures can be treated as having a similar effect as expropriation. (14)
What this expanded definition means in layman’s terms is that a foreign corporation can sue the government for almost anything so long as it impedes in any way its right to profit, in real terms or in theory. A well-known case is Metalclad, a US firm, which sued Mexico because the government imposed environmental measures, citing that this impeded Metalclad’s right to profit.
It is interesting to note why the US just did not add this expanded definition of expropriation in Order no. 39 since it put all the key provisions, from national treatment to dispute settlement, of the investment agreements already. A theory could be that if stated in Order no. 39, it can benefit non-US foreign investors, specifically European investors whose governments did not aid the US in its invasion of Iraq.
“Where an international agreement to which Iraq is a party provides for more favorable terms with respect to foreign investors undertaking investment activities in Iraq, the more favorable terms under the international agreement shall apply.”
As stated earlier, Order no. 39 anticipates the entry of Iraq into other international agreements like the WTO and bilateral agreements. It therefore adds, almost as a footnote at the end of the order, a provision that ensures that whatever agreements Iraq joins later, will still be beneficial to foreign investors.
Order no. 39 ties in with the other orders issued by the CPA - a Banking Law, the Company Law, Trade Liberalization and an order on taxes. All of them complement each other in establishing the Iraqi economy as a corporate haven. As the Iraqi Minister of Finance Kamel Al-Gailani explained, these measures are all part of the plan to reconstruct Iraq. “The reforms will significantly advance efforts to build a free and open market economy in Iraq.” (15)
QUICK, WHILE NO ONE’S LOOKING
In the end, Order no. 39 encapsulates all key provisions of trade and investment agreements that took months, if not years to pass, in other countries and in other multilateral fora. These agreements were negotiated and with the case of the FTAA is still being negotiated in highly secretive meetings. The MAI would not have been opposed if its draft document had not been leaked out into the internet by activists. The NAFTA was passed with many legislators not knowing what they agreed to. President George W. Bush used the fast track privilege where congress’ participation is limited to a vote of yes or no to the whole agreement. The US-Chile FTA was so secret that two months after it was signed, Chilean social movements still could not get a copy of the agreement. This is because if the public were allowed to participate, provisions that privilege foreign investors over the people and public interests would never go through. Even now, many developing country governments are fighting to defend their own national interests, albeit domestic corporate interests. The FTAA for example has eight definitions of investment and the text itself is heavily bracketed, indicating the high level of disagreement between negotiators. In the WTO, the US and its cohorts have to resort to arm-twisting or threats of military or economic sanctions to get agreements passed.
Order no. 39 was met with no such resistance simply because the people of Iraq were not asked if they agreed to it or not. While the people of Iraq are busy defending their lives and resisting the occupation, the US slipped in an order that effectively binds the Iraqis to a trade agreement that enshrines the rights of foreign investors, and as detailed above, surpasses many exisitng agreements. Besides, as a top US military official best explains, there was no need for negotiations as the US is in control of Iraq, “At this point we’d be negotiating with ourselves because we are the government.” (16)
* Marylou Malig is a research associate with Focus on the Global South. ([email protected])
1. Coalition Provisional Authority Administrator Paul Bremer, Iraq interim Prime Minister Ayad Allawi, Iraq interim President Ghazi Yawar, Chief Justice Mehdad Mahmoudi, Deputy Prime Minister Barham Salih and British envoy David Richmond.
2. Section 2 of CPA Order no. 39
3. The GATS is an agreement on trade in services not investment. But since in its four “modes of supply” in trade in services, it covers foreign direct investment in services (“by a service supplier of one Member, through commercial presence in the territory of any other Member;”) GATS can then be said to have rules on investment and is thus called by some as the first multilateral investment agreement under the WTO.
4. Allianza Social Continental, “The FTAA Unveiled: A Citizens’ Critique of the November 2002 Draft of the Free Trade Area of the Americas” January 2003. p. 56
5. Public Citizen, “NAFTA Chapter 11 Investor-to-State Cases: Bankrupting Democracy Lessons for Fast Track and the Free Trade Area of the Americas” Washington DC, September 2001, p. iv
6. Allianza Social Continental, “The FTAA Unveiled: A Citizens’ Critique of the November 2002 Draft of the Free Trade Area of the Americas” January 2003. p. 51
7. Article 9 of the draft FTAA Investment Chapter, even more clearly than Article 1109 of NAFTA, would prevent sovereign states from using this type of capital controls.”p. 51
8. Barlow, Maude and Clarke, Tony. “Making the Links: A People’s Guide to the WTO and the FTAA” Council of Canadians and Polaris Institute 2003. p.5
9. Barlow, Maude and Clarke, Tony. “Making the Links: A People’s Guide to the WTO and the FTAA” Council of Canadians and Polaris Institute 2003. p.6
10. Public Citizen, “NAFTA Chapter 11 Investor-to-State Cases: Bankrupting Democracy Lessons for Fast Track and the Free Trade Area of the Americas” Washington DC, September 2001, p. 4
11. Public Citizen, “NAFTA Chapter 11 Investor-to-State Cases: Bankrupting Democracy Lessons for Fast Track and the Free Trade Area of the Americas” Washington DC, September 2001, p.vi
12. This inability to document cases of the UNCITRAL is attributed to a lack of administrative staff, which takes a stretch of imagination to believe
13. Public Citizen, “NAFTA Chapter 11 Investor-to-State Cases: Bankrupting Democracy Lessons for Fast Track and the Free Trade Area of the Americas” Washington DC, September 2001, p.7
14. Greenfield, Gerard. “The NAFTA ruling on Metalclad vs. Mexico - The Broader Context - September 2000
15. Press Statement: Iraqi Minister of Finance Kamel Al-Gailani, September 21,2003
16. Top US military official quoted