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BEFORE THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
ONE HUNDRED THIRD CONGRESS
FIRST SESSION
SEPTEMBER 10, 1993
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BEFORE THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
ONE HUNDRED THIRD CONGRESS
FIRST SESSION
SEPTEMBER 10, 1993
Printed for the use of the Committee on Foreign Relations
KB 15
«*
Ssas
U.S. GOVERNMENT PRINTING OFFICE
72-456cc WASHINGTON : 1993
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington. DC 20402
ISBN 0-16-043234-0
COMMITTEE ON FOREIGN RELATIONS
CLAIBORNE PELL, Rhode Island, Chairman
JOSEPH R. BIDEN, Jr., Delaware
PAUL S. SARBANES, Maryland
CHRISTOPHER J. DODD, Connecticut
JOHN F. KERRY, Massachusetts
PAUL SIMON, Illinois
DANIEL P. MOYNIHAN, New York
CHARLES S. ROBB, Virginia
HARRIS WOFFORD, Pennsylvania
RUSSELL D. FEINGOLD, Wisconsin
JESSE HELMS, North Carolina
RICHARD G. LUGAR, Indiana
NANCY L. KASSEBAUM, Kansas
LARRY PRESSLER, South Dakota
FRANK H. MURKOWSKI, Alaska
HANK BROWN, Colorado
JAMES M. JEFFORDS, Vermont
PAUL COVERDELL, Georgia
JUDD GREGG, New Hampshire
HARLAN MATHEWS, Tennessee
GERYLD B. CHRISTIANSON, Staff Director
JAMES W. Nance, Minority Staff Director
(ID
CONTENTS
Page
Tarullo, Daniel K., Assistant Secretary of State for Economic and Business
Affairs, Department of State 3
Prepared statement 5
Appendix
Statement of Jerry J. Jasinowski, President of the National Association of
Manufacturers 15
Statement of the United States Council for International Business 16
Statement of Joel W. Messing 17
Statement of Ambassador Charlene Barshefsky 19
Responses of U.S. Department of State to Questions Asked by Senator Pell .... 21
(in)
BILATERAL INVESTMENT TREATIES WITH:
ARGENTINA, TREATY DOC. 103-2; ARMENIA,
TREATY DOC. 103-11; BULGARIA, TREATY
DOC. 103-3; ECUADOR, TREATY DOC. 103-15
KAZAKHSTAN, TREATY DOC 103-12
KYRGYZSTAN, TREATY DOC. 103-13
MOLDOVA, TREATY DOC. 103-14; AND ROMA-
NIA, TREATY DOC. 102-36
FRIDAY, SEPTEMBER 10, 1993
U.S. Senate,
Committee on Foreign Relations,
Washington, DC.
The committee met, pursuant to notice, at 10:50 a.m., in room
SD-419, Dirksen Senate Office Building, Hon. Claiborne Pell
(chairman of the committee) presiding.
Present: Senator Pell.
The Chairman. The Committee on Foreign Relations will come
to order. The first order of business is to apologize to those who are
here both as witnesses and people in the audience, but we were de-
layed at a ceremony at the White House and I do apologize.
This morning we will be considering the bilateral investment
treaties with Argentina, Armenia, Bulgaria, Ecuador, Kazakhstan,
Kyrgyzstan, Moldova, and Romania. The principal purpose of the
bilateral investment treaties is to promote the free flow of inter-
national investment and to protect our own American investment
in foreign countries.
There are currently investment treaties in force with 13 coun-
tries. In addition to the 8 treaties before the committee this morn-
ing, the administration is negotiating similar treaties with 20 addi-
tional countries. In view of the rapid expansion of these treaties,
we are eager to hear how successful these treaties have been in in-
creasing U.S. investment.
I will be particularly interested to learn whether there is any evi-
dence to suggest that increased investment as a result of the pro-
tection of these treaties may result in a reduction in direct U.S. for-
eign assistance over a period of time.
We have received statements in support of these treaties from
the National Association of Manufacturers, the United States
Council for International Business, and Joel Messing, an inter-
national lawyer, which, without objection, will be made a part of
the record of this hearing.
(1)
[The information referred to may be found in the appendix.]
The Chairman. I welcome as a witness this morning the Hon.
Daniel Tarullo, Assistant Secretary of State for Economic and Busi-
ness Affairs, who is accompanied by Donald Abelson, Assistant
U.S. Trade Representative for Services, Investment and Intellec-
tual Property.
I would also add that I hope the human rights treaties, the con-
ventions on racism, and women's rights, the American Convention
on Human Rights, and the Covenant on Economic, Social, and Cul-
tural Rights, would be coming up soon from the State Department.
They have languished there for too many years and we really
would welcome them coming.
But that is not the business in hand. That was just to make this
request to the Department.
[The information referred to follows:]
The U.S. ratified the Covenant on Civil and Political Rights last year and will rat-
ify the Torture Convention as soon as Congress enacts the necessary implementing
legislation, which we earnestly hope will be in the near future.
Four other human rights treaties are currently pending before the U.S. Senate for
advice and consent to ratification: (1) the Convention on the Elimination of All
Forms of Racial Discrimination, (2) the American Convention on Human Rights, (3)
the International Covenant on Economic, Social and Cultural Rights, and (4) the
Convention on the Elimination of All Forms of Discrimination Against Women. The
first three were transmitted to the Senate in February 1978; the Women's Conven-
tion was signed and transmitted to the Senate in 1980.
As Secretary Christopher announced at the World Conference on Human Rights
in June, the Administration has given priority to ratification of the Convention on
the Elimination of All Forms of Racial Discrimination. The detailed legal analysis
which forms the basis for the "package" of reservations, understandings and dec-
larations is well under way. We hope to be in a position for a hearing before the
Senate Foreign Relations Committee shortly.
In addition, the Administration has indicated its strong support of the Convention
on the Elimination of All Forms of Discrimination against Women. As Assistant Sec-
retary Shattuck recently announced at a hearing of the House Foreign Affairs Sub-
committee on International Security, International Organizations and Human
Rights, we will move for ratification of this Convention as soon as the Senate has
acted on the Racial Discrimination Convention. Preparing the legal analysis of the
impact this treaty will have on domestic law is a somewhat larger undertaking since
no "package" of reservations, understandings and declarations was prepared when
the Convention was submitted to the Senate in 1980. However, the Departments ex-
pects to be able to make a detailed recommendation to the White House on this
treaty later this fall.
A fifth treaty, the Convention on the Rights of the Child, was adopted by the UN
General Assembly in 1989 and entered into force the following year. So far, there
has been no decision by the White House on whether the U.S. should sign the trea-
ty. We strongly support the purposes and principles of this Convention, but believe
it requires careful study because it could have a significant impact on state and
local law (for example in the areas of child custody and support, foster care, primary
education, etc.) and because of its potential budgetary and programmatic impact in
terms of benefit programs for children.
The Chairman. Secretary Tarullo, we are glad you are here and
look forward to hearing whatever you have to say.
STATEMENT OF HON. DANIEL K. TARULLO, ASSISTANT SEC-
RETARY OF STATE FOR ECONOMIC AND BUSINESS AFFAHtS,
DEPARTMENT OF STATE; ACCOMPANffiD BY DONALD S.
ABELSON, ASSISTANT U.S. TRADE REPRESENTATIVE FOR
SERVICES, INVESTMENT AND INTELLECTUAL PROPERTY,
AND MARGARET PICKERING, OFFICE OF THE LEGAL AD-
VISER, DEPARTMENT OF STATE
Mr. TARULLO. Thank you very much, Mr. Chairman. If I might,
two preliminary matters first. There is a written statement from
Deputy USTR Charlene Barshefsky which I would ask be taken
into the record.
The Chairman. It will be inserted in the record as if read.
[The prepared statement of Ms. Barshefsky may be found in the
appendix.]
Mr. Tarullo. Thank you. Second, you and your staff submitted
a number of questions to the Department. We have written an-
swers to those which I would also ask to be entered into the record.
The Chairman. They will be part of the record and the dialog on
this subject, Mr. Tarullo.
[The information referred to may be found in the appendix.]
Mr. TARULLO. Thank you very much. I appreciate the oppor-
tunity to testify before the Foreign Relations Committee as the ad-
ministration seeks the advice and consent of the Senate to ratifica-
tion of bilateral investment treaties with Argentina, Armenia, Bul-
garia, Ecuador, Moldova, Kazakhstan, Kyrgyz Republic, and Roma-
nia.
The administration welcomes the holding of hearings at this
time. Argentina, Bulgaria, Kazakhstan, and Romania have already
ratified tne treaties. The Senate's advice and consent would permit
the treaties with those countries to enter into force as soon as all
necessary formalities and instruments of ratification could be ac-
complished and achieved.
I nave submitted prepared testimony which includes a report on
the status of U.S. relations with the proposed treaty partners. In
my oral statement today I would like to briefly touch on three top-
ics. First, how the bilateral investment treaty program fits into the
administration's overall policy on outward direct investment. Sec-
ond, the protections for U.S. investors provided by our bilateral in-
vestment treaties. And third, how these treaties can advance cer-
tain U.S. interests and encourage reform-minded countries to adopt
and maintain market-oriented policies.
As part of our outward investment policy, the BIT program is
one element of the administration's overall international economic
policy, which has as two of its key aims promotion of U.S. exports
and the enhancement of the international competitiveness of our
companies. This approach is consistent with the President's pro-
gram to renew the American economy, and his insistence that as
foreign investment is welcomed here, our investors must be equally
welcome in other countries.
The bilateral treaty program, which has enjoyed bipartisan sup-
port during its existence, is consistent with our overall investment
policy. It is a useful tool for promoting and protecting U.S. invest-
ment interests, especially in those countries where our rights are
not protected through treaties of friendship, commerce, and naviga-
tion, or through the various instruments of the Organization of
Economic Cooperation and Development.
The program has assumed a new and, I think, very important di-
mension as it has been applied to the Republics of the former So-
viet Union and to other countries which are making the shift from
a command and control economy to a market-based economy.
U.S. bilateral investment treaties provide five basic protections
for U.S. investors. First and fundamentally, they level the playing
field by guaranteeing U.S. investors parity with investors from
other countries. Altogether, other countries have signed over 600
BITs worldwide. Parties to those treaties use them to increase
their company's ability to penetrate new markets. We likewise need
to help our companies compete, and we can use BIT's to open up
investment opportunities for them.
The national treatment and most ^vored nation treatment are
two of the key obligations of the treaties. Our BITs insure that
U.S. companies will receive treatment no less favorable than that
accorded to their competitors.
Second, these treaties protect U.S. investors in the event of ex-
propriations by incorporating into the treaty the highest inter-
national law standards for expropriation and compensation, and by
guaranteeing that the compensation is prompt, adequate, and effec-
tive.
Third, U.S. investors are guaranteed the right to transfer funds
without delay using a market rate of exchange. Such a guarantee
can help increase U.S. exports and its free transfers facilitate the
purchase and import of U.S-produced goods and services.
Fourth, our BIT's prohibit a party from imposing performance re-
quirements on an investor, such as local content or export perform-
ance requirements. This requirement helps — this prohibition helps
guarantee that U.S. investors will not be coerced by host govern-
ments into inefficient trade distorting practices. This provision may
also open up new markets for U.S. producers and increase U.S. ex-
ports.
Fifth, our BIT's grant investors the option of submitting an in-
vestment dispute with the government of the other treaty partner
to international arbitration. The BIT's give the investor the option
of going to an international forum, rather than having the sole
choice of the domestic courts of the host country.
Secretary Christopher has emphasized the promotion of U.S. eco-
nomic security as a principal goal of our foreign policy. I have
noted that our BIT program contributes toward this goal.
Today, I believe our BIT's are especially important in promoting
our economic interests and developing commercial opportunities in
the countries of Central and Eastern Europe and the former Soviet
Union. The changes in these countries present our companies with
unique opportunities to participate in the privatization of those
economies.
Our BIT's will remove investment restrictions and establish com-
mon market based legal, economic, and commercial rules. In doing
so, they will give our companies effective first-mover or first-in ad-
vantages by getting them in at the beginning of the moves to a
market system, with obvious important long-term implications.
They constitute a framework of government obligations on the
treatment of investments within which U.S. companies can operate.
The choice to invest, of course, is a choice made by private com-
panies, but these treaties in the former Soviet Union Republics do
assure that there is a basic framework providing some certainty for
U.S. investors that choose to do business in those countries.
We hope to encourage market-oriented policy changes in other
countries through the BIT negotiation process, such as in the area
of privatization and performance requirements. Moreover, BITs
give protection against future expropriation, should any of these
countries reverse course.
I might mention in particular the treaty with Argentina, which
is our first to be completed with a South American country. It rep-
resents an important milestone in the BIT program and, indeed, in
international law generally. Argentina is engaged in the most com-
prehensive privatization program in its history and is implement-
ing over wide-ranging market reforms as well. The BIT can help
support these moves and get our companies in on the ground floor.
One item of particular interest in the Argentine BIT is that, like
many Latin American countries, Argentina has long subscribed to
the so-called Calvo Doctrine which requires that foreign investors
submit disputes arising in a country to that country's local courts.
This treaty contains an absolute right to international arbitration
of investment disputes and thereby removes U.S. investors from
the restrictive operation of the Calvo Doctrine. Such a precedent
with Argentina has already helped pave the way for similar agree-
ments with other Latin American countries.
While the treaty with Ecuador is our first with an Andean Pact
country, we are also negotiating with Bolivia, Peru, Colombia, and
Venezuela. In addition, we are in advanced stages of negotiations
with Costa Rica and Jamaica and we have other negotiations at
various stages in Latin America as well.
In closing, let me thank you, Mr. Chairman, for your continued
interest in the BIT program and also for that of your very able
staff. I would be happy to answer any questions you may have.
[The prepared statement of Mr. Tarullo follows:]
Prepared Statement of Daniel K. Tarullo
Mr. Chairman, thank you very much for the opportunity to testify before the For-
eign Relations Committee as the administration seeks the advice and consent of the
Senate to ratification of bilateral investment treaties with Argentina, Armenia, Bul-
garia, Ecuador, Moldova, Kazakhstan, Kyrgyzstan (Kyrgyz Republic) and Romania.
The administration welcomes the holding of hearings at this time. Argentina, Bul-
garia, Kazakhstan and Romania have already ratified the treaties. The Senate's ad-
vice and consent would permit the treaties with those countries to enter into force
as soon as instruments of ratification can be exchanged.
In my statement today, I would like to cover three topics:
1. First, how the bilateral investment treaty program fits into the adminis-
tration's overall policy on outward direct investment.
2. Second, the protections for U.S. investors provided by our bilateral invest-
ment treaties.
3. Third, how these treaties advance U.S. interests and encourage reform-
minded countries to adopt and maintain market-oriented policies. In addition,
I am providing in an annex to my testimony a report on the status of U.S. rela-
tions with the proposed treaty partners.
THE PLACE OF BITS IN U.S OUTWARD INVESTMENT POLICY
As part of our outward investment policy, the BIT program is one element of the
administration's overall international economic policy, which has as two of its key
aims the promotion of U.S. exports and the enhancement of the international com-
petitiveness of U.S. companies. This approach is consistent with the President's pro-
gram to renew the American economy, and his insistence that as foreign investment
is welcomed here, our investors must be equally welcome in other countries. The im-
portance of our outward investment is seen in various ways.
U.S. companies in energy and other natural resource sectors continue to search
around the world for profitable investments. Particularly in countries that have only
recently adopted market-oriented reforms, a government-to-government structure of
investment rights and protections can be vital. Investment abroad is also an in-
creasingly important part of a successful export strategy. Manufacturers need a
local presence to market, service and adapt their products. In many instances, the
need is for a distribution outlet or network under the control of the manufacturer.
In some cases, production facilities or joint ventures may be desirable as well, par-
ticularly in sectors that are evolving into truly global industries.
Finally, service providers almost Dy definition require a physical presence in mar-
kets where they operate. Our highly efficient financial services, telecommunications
and other sectors need investments in foreign economies in order to compete effec-
tively with rivals from other parts of the world.
The administration is pursuing on multiple fronts the dual aims of export pro-
motion and international competitiveness in our outward investment policy. We
seek market opening, nondiscriminatory treatment and basic fairness for U.S. inves-
tors.
In key markets such as Japan and Korea, where an on-the-ground presence is es-
pecially important in gaining effective access for U.S. exports, we are embarking on
intensive bilateral negotiations to address a variety of formal and informal barriers
to U.S. investors. In the Uruguay round, we have negotiated an agreement that con-
tains important prohibitions on trade-related performance requirements. The serv-
ices negotiations in the round will also open up important markets for U.S. compa-
nies.
In the OECD, we have in place the codes of liberalization of capital movements
and current invisible operations, which cover the establishment of an investment,
and the national treatment instrument concerning established investment. We now
are supporting the OECD's conduct of a comprehensive study on the feasibility of
negotiating a so-called "wider investment instrument" that could serve as a binding,
state-of-the-art, comprehensive multilateral investment agreement. The bilateral in-
vestment treaty program, which has enjoyed bipartisan support during its existence,
is consistent with our overall investment policy. It is a useful tool for promoting and
protecting U.S. investment interests, especially in those countries where our rights
are not protected through the treaties of friendship, commerce and navigation
(FCN), or similar agreements, or through the OECD instruments. The program has
assumed a new and important dimension in its application to the republics of the
former Soviet Union and other countries embarking on market-based reforms.
BILATERAL INVESTMENT TREATIES PROVIDE VITAL PROTECTIONS
U.S. bilateral investment treaties provide five basic protections for U.S. investors:
— First, they level the playing field by guaranteeing U.S. investors parity with
investors from other countries. Altogether, other countries have signed over 600
BITs worldwide. Parties to those treaties use them to increase their companies'
ability to penetrate new markets. We likewise need to help our companies com-
pete and can use BITs to open up opportunities for them, particularly where
countries have heretofore restricted foreign direct investment.
Our treaties specify that U.S. investors will be treated as well as domestic
investors (national treatment). If a country chooses to treat foreign investors
more favorably than domestic investors, these treaties also ensure that U.S. in-
vestors will be treated as well as any other foreign investor (most favored na-
tion treatment). Any exceptions to these rules are limited and specifically de-
scribed in annexes or protocols of the treaties.
Our BITs thus ensure that U.S. companies will receive treatment no less fa-
vorable than that accorded to their competitors.
— Second, these treaties protect U.S. investors in the event of expropriations
by incorporating into the treaty the highest international law standards for ex-
propriation and compensation and by guaranteeing prompt, adequate and effec-
tive compensation equal to the market value of their investments. Such a guar-
antee serves as both a deterrent to and remedy for expropriation.
— Third, U.S. investors are guaranteed the right to transfer funds without
delay using a market rate of exchange. This is clearly very important for repa-
triating profits, but it covers all transfers, including interest and proceeds from
the liquidation of an investment. Such a guarantee can also help increase U.S.
exports since free transfers facilitate the purchase and import U.S. -produced
goods and services. Further, by covering royalties and fees, such a guarantee
should help increase U.S. exports related to intellectual property.
— Fourth, our BITs prohibit a party from imposing performance requirements
on an investor, such as local content or export performance requirements. This
helps guarantee that U.S. investors will not be coerced by host governments
into inefficient and trade distorting practices. This provision may also open up
new markets for U.S. producers and increase U.S. exports. U.S. investors pro-
tected by BITs can purchase competitive U.S. -produced components without re-
striction as inputs in their production of various products. They can also import
other U.S.-produced products for distribution and sale in the local market. And
they cannot be forced, as a condition of establishment or operation, to export
back to the U.S. market or to third-country markets locally produced goods.
Argentina has agreed in its BIT with us to eliminate its performance require-
ments in the automotive industry no later than eight years from the entry into
force of the treaty, a step that should benefit U.S. automotive parts producers.
— Fifth, our BITs grant investors the option of submitting an investment dis-
pute with the treaty party's government to international arbitration. There is
no requirement to use that country's domestic courts.
As some of the examples I have cited indicate, many investment restrictions have
the effect of restricting trade flows. Our BITs thus not only help remove restrictions
on U.S. investments but also remove impediments to U.S. exports.
I would like to point out two other important BIT elements:
— In our treaties with countries which are still in transition to market econo-
mies^— i.e., those in Central and Eastern Europe and the New Independent
States of the former Soviet Union, we have explicitly addressed "doing business"
issues. These include obtaining office space; ensuring nondiscriminatory access
to public utilities and other public services; and the right to conduct market
studies, advertise, disseminate commercial information and market goods and
services. We have included such provisions in our BITs with Armenia, Bulgaria,
Kazakhstan, Kyrgyzstan, Moldova and Romania to make clear that BIT guaran-
tees extend to the basics of doing business.
— Our BITs give companies the right to engage top managerial personnel of
their choice, regardless of nationality. This ensures that a company can hire the
best available talent to manage its investment — a key element in being competi-
tive in a global market. It is also a protection against any arbitrary local nire
quotas which might interfere with a company's ability to manage its invest-
ment.
In sum, U.S. BITs are the most rigorous in the world. In areas such as freedom
from discriminatory treatment in establishing an investment and freedom from per-
formance requirements the standards of U.S. BITs exceed those of other industri-
alized nations.
BITS ADVANCE U.S. INTERESTS
Secretary Christopher has emphasized that promotion of U.S. economic security
is a principal goal of our foreign policy. I have noted that our BIT program contrib-
utes toward this goal. Let me amplify how the BIT program advances our commer-
cial, foreign policy, and international economic interests.
The commercial importance of BITs is illustrated by the fact that U.S. investors
had some $487 billion invested overseas (on a historical cost basis) at the end of
1992. Traditionally, countries such as Canada, the U.K., Germany and other West
European countries have been the primary hosts of U.S. investment abroad. In re-
cent years, however, U.S. investment in Central and Eastern Europe, in Latin
America, and in East Asia has grown significantly. U.S. companies are also begin-
ning to invest in Russia and the other republics of the former Soviet Union. Thus,
U.S. investors are particularly interested in receiving BIT protections in those coun-
tries.
U.S. investment abroad generates important trade, employment and other impor-
tant benefits for the United States. Trade and investment are linked, and are be-
coming increasingly so. U.S. affiliates abroad are our best customers. As I have dis-
cussed, companies need to have an on-site presence, even in developing countries.
American firms increasingly use their overseas affiliates' sales and distribution net-
8
works, R&D expertise and specialized production techniques to compete with Japa-
nese and European companies in foreign markets.
U.S. exports to foreign affiliates rose from $68 billion in 1986 to $115 billion in
1991, an increase of 70 percent. Such exports accounted for 27 percent of total U.S.
merchandise exports in 1991. Moreover, these exports accounted for an estimated
2.2 million of the 7.9 million U.S. jobs supported by overall U.S. merchandise ex-
ports in 1991.
The overseas operations of U.S. companies also make substantial contributions to
the U.S. balance of payments. For example, in 1991, they contributed a record net
surplus of $21 billion thru sales to affiliated companies overseas.
To date, the United States has signed 25 BITs, of which 13 are now in force. Over
the last three years, we have had negotiations with another 20 countries, and at
least 25 additional countries have expressed interest in a BIT.
The U.S. business community strongly supports the BIT program. Through the
State Department's Advisory Committee on International Investment and the var-
ious advisory committees of USTR and the Commerce Department, we have closely
consulted with business, labor, legal and academic representatives in developing
and refining the BIT prototype text and in pursuing the program. The bilateral trea-
ty subgroup of the U.S. Council for International Business has also been particu-
larly helpful in this regard.
Our BITs especially are important in promoting our economic interests and devel-
oping commercial opportunities in the countries of Central and Eastern Europe and
the former Soviet Union. Our companies may enjoy once-in-a-lifetime opportunities
to participate in the privatization of these economies.
Our BITs will remove investment restrictions and establish common, market-
based legal, economic and commercial rules. In doing so, they give our companies
"first mover" or "first in" advantages by getting them in at the beginning of the
move to market systems, with obvious important long-term implications. They con-
stitute a framework of government obligations on the treatment of investments
within which U.S. companies can operate.
In addition, these countries learn from our negotiations, and apply these lessons
not just in the treaty but also in their domestic legislation. The administration will
continue to pursue treaty negotiations with those countries in transition with which
we have not yet concluded BITs.
— The Senate has already given its advice and consent to treaties with Po-
land, Russia, the Czech Republic and Slovakia;
— Today, we are presenting BITs with Armenia, Bulgaria, Kazakhstan,
Kyrgyzstan, Moldova and Romania;
— We are negotiating with the Baltics, Belarus, Hungary, Mongolia,
Turkmenistan and Ukraine; and
— We are prepared to negotiate treaties with all of the other newly emerging
democracies which want BITs with us.
Let me also add that our BIT program with these countries helps advance our
foreign policy goal of promoting their moves to democratic pluralism and the rule
of law as well as a market economy. We have worked closely with the Congress in
shaping the components of our policy, which include support for privatization, eco-
nomic stabilization, debt rescheduling, trade financing, humanitarian and food aid,
and the promotion of nuclear safety and environmental programs.
BITs are also a means of promoting our economic and commercial interests in
other countries that are turning toward market-oriented policies. We hope to en-
courage these policy changes through the BIT negotiation process, such as in the
area of privatization. Moreover, BITs give protection against future expropriations
should any of these countries reverse course.
The treaty with Argentina, our first to be completed with a South American coun-
try, represents an important milestone in the BIT program and, indeed, in inter-
national law generally. Argentina is engaged in the most comprehensive privatiza-
tion program in its history and is implementing other wide-ranging, market-oriented
reforms as well. The BIT can help support these moves and get our companies in
on the ground floor.
Like many Latin American countries, Argentina has long subscribed to the so-
called Calvo Doctrine, which inter alia requires that foreign investors submit dis-
putes arising in a country to that country's local courts. The conclusion of this trea-
ty, which contains an absolute right to international arbitration of investment dis-
putes, removes U.S. investors from this restriction. Such a precedent has already
helped pave the way for similar agreements with other Latin American countries
as the competition for foreign investment intensifies there and in other areas of the
world.
While the treaty with Ecuador is our first with an Andean Pact country, we are
also negotiating with Bolivia, Peru, Colombia and Venezuela. In addition, we are in
advanced stages of negotiations with Costa Rica and Jamaica and have other ongo-
ing negotiations .
Outside of Latin America, we have held at least one round of negotiations with
a number of countries. Our BIT program has posed a challenge with respect to
many of the countries in East Asia, particularly the members of ASEAN. A number
of those countries heretofore have not been willing to meet all of our BIT standards,
such as providing national treatment for establishment or prohibiting performance
requirements. Some have suggested that we lower our standards in order to con-
clude BITs with those countries. We believe that would be a mistake, since we have
been very successful in raising international standards through our BIT program.
We want to continue that process, not step backwards.
One final point: the resources available from foreign investment to the economies
in transition and other reforming countries far exceed anything the international
donor community could provide in foreign assistance on a sustained basis. In fact,
foreign direct investment has been the largest component in international resource
flows to developing countries over the last five years. At a time of increased demand
for foreign assistance and the reduced levels of that assistance available from some
traditional donors, it is vitally important for developing countries and the economies
in transition to attract domestic and foreign private investment. To do so, these
countries must undertake the market-oriented reforms needed to make themselves
attractive to private capital and otherwise establish a favorable investment climate.
A bilateral investment treaty is one element in this program. Other important ele-
ments include bilateral tax and intellectual property rights agreements, which pro-
vide additional important guarantees and protections for U.S. investors.
In closing, let me thank you, Mr. Chairman, for your continued interest in the
BIT program, and for that of your very able staff. I would be happy to answer any
questions you may have.
ANNEX
STATUS OF U.S. RELATIONS WITH THE PROPOSED BIT PARTNERS.
This annex reviews briefly the status of U.S. relations with the eight countries
on whose BITs the Senate is being asked to give its advice and consent. It also re-
ports on the status of the BITs the senate approved over the last two years.
In Eastern Europe, Romania has made substantial progress toward democracy,
human rights and a free market economy over the last eighteen months, and our
bilateral relationship is expanding proportionately. Romania complies fully with the
freedom of emigration requirements of the Jackson-Vanik amendment. The focus of
U.S. policy is to anchor Romania firmly to the West. Thus, in addition to approval
of the BIT, the administration supports the extension of MFN status to Romania —
once our largest trading partner in Eastern Europe — as quickly as possible and
urges speedy approval oithe complementary U.S.-Romania trade agreement as well.
In Bulgaria, successive governments have sought since 1990 to improve relations
with the U.S. on the grounds that Bulgaria's foreign policy goals basically converge
with ours. Bulgaria has made dramatic progress in consolidating a democratic sys-
tem, and civil and human rights have been restored to ethnic minorities. It has also
made significant progress in its economic reform efforts, quickly laying most of the
building blocks for a market economy. We are sending an OPIC investment mission
to both Romania and Bulgaria this fall.
Turning to the Republics of the former Soviet Union, the United States has good
diplomatic relations with the countries whose treaties are before you today.
• Kazakhstan has advanced toward democratization and the establishment
of a market economy. Its enormous mineral resources make it attractive to for-
eign investment, with oil and natural gas reserves that exceed Kuwait's. U.S.,
British, French and Italian energy firms have already formed joint ventures in
the country.
• Kyrgyzstan is one of the most democratic-minded of the New Independent
States. President Akayev and his government are committed to maintaining
good relations with a broad range 01 countries, particularly the United States.
• Moldova has made significant progress in implementing democratic and
economic reforms. The Moldovan Government has a positive record of achieve-
ment in the human rights field. Relations with the United States are accord-
ingly positive and forward-looking.
• Although Armenia has made advances toward democratization and the es-
tablishment of a market economy, we are very concerned about the conflict with
Azerbaijan over Nagorno-Karabakh.
10
In South America, our relationship with Argentina is perhaps closer now than at
any other time in history. President Menem s market-oriented policies have won
widespread support. Argentina seeks to further deepen our relationship into a full
partnership of consultation and cooperation on bilateral and global issues.
Ecuador has a long history of cooperative relations with the United States. It has
strong democratic institutions and participates actively in inter-American organiza-
tions. Ecuador has eliminated almost all coca production and has developed a vigor-
ous program of combating money laundering and drug trafficking. The current gov-
ernment also resolved to our satisfaction an investment dispute involving the U.S.
owner of the EMELEC power company.
Over the last two years, the Senate has given its advice and consent to treaties
with Sri Lanka, Poland, Russia, the Congo, Tunisia and Czechoslovakia. The trea-
ties with Sri Lanka and Tunisia are in force. The treaty with Czechoslovakia en-
tered into force at the end of 1992 and automatically continued in force with the
Czech Republic and the Republic of Slovakia when they came into being.
The business and economic relations treaty with Poland, which contains BIT ele-
ments, has been ratified by both the United States and Poland and awaits an ex-
change of instruments of ratification to bring it into force. The exchange is pending
action by the Government of Poland to improve its intellectual property rights re-
gime. The treaty with the Congo has also been ratified by both parties and we are
making arrangements to exchange instruments of ratification.
The Russian Parliament has not yet ratified our BIT with Russia. When the Par-
liament has ratified the treaty and instruments of ratification have been exchanged,
the treaty will enter into force.
The Chairman. Thank you very much indeed. I would like to
know why the countries you chose were chosen to negotiate these
BITs with, when there were many others in the world that were
not chosen?
Mr. Tarullo. Mr. Chairman, it is not so much a question of
choosing only a limited list of countries. We have indicated gen-
erally to countries throughout the world our general interest in ne-
gotiating BIT treaties. And, indeed, we have in many instances
made available prototype drafts so that governments have an op-
portunity to assess whether they are interested.
But we do require, before we are going to begin negotiations, an
indication of a certain commitment to the kinds of principles that
are embodied in the treaties. When a country evinces an interest
in adhering to those principles and when we have good reason to
believe that they are sincere in that indication of interest, then in
general we are prepared to negotiate with them. As the negotia-
tions proceed, we may find out that there are some problems; a
country cannot move quite as quickly as it may have wanted to. In
these instances, the negotiations over various time periods have
been successfully concluded.
So there is no magic to the list of eight. As you know, there have
been 15 beforehand and there will be others to come later.
The Chairman. I believe it is correct to say that we have given
our advice and consent to BIT's with 15 nations now. It is my un-
derstanding that each of these has entered into force except the
ones with Poland, Russia, and China, the People's Republic. What
were the reasons for delay in each of these countries?
Mr. Tarullo. Mr. Chairman, in the case of Poland, as a matter
of policy we are awaiting satisfactory changes in the intellectual
property protections afforded by the Government of Poland before
we formally exchange notices of ratification. Once the Polish Gov-
ernment has made the required changes, that treaty — we will rat-
ify that treaty and it will enter into force.
11
In the case of Russia, the Russian Parliament has not acted on
the treaty to this point, and we are simply awaiting action by the
Russian Parliament.
And I believe in the case of China
The Chairman. I misspoke. I should not have said China. I
meant the Congo.
Mr. Tarullo. I understand, Mr. Chairman. In the case of the
Congo, I believe we have a problem of conforming language. Ms.
Pickering?
Ms. Pickering: We are making arrangements with the Congo to
exchange instruments of ratification, which we hope to do very
soon.
Mr. Tarullo. I gather the technical problems have been worked
out.
The Chairman. All right. And with what countries is the admin-
istration presently negotiating BIT?
Mr. Tarullo. Let us see. We have a broad range that are in var-
ious stages of negotiation. I might ask my colleagues from USTR
to review that list for you.
The Chairman. Or maybe you could submit the list for the
record.
Mr. Tarullo. Or submit it for the record if you would like.
Mr. Abelson: Oh, sure, absolutely. There are about 18 countries
and we can submit that for the record.
[The information referred to follows:]
BIT negotiations have been held with the following countries:
AMERICAS
Barbados; Bolivia; Colombia; Costa Rica; Jamaica; Peru; Uruguay and Venezuela.
AFRICA/NEAR EAST
Nigeria.
ASIA
China; Hong Kong and Pakistan.
EUROPE— INCLUDING FORMER SOVIET UNION
Belarus; Estonia; Hungary; Latvia; Lithuania; Mongolia; Turkmenistan and
Ukraine.
The Chairman. Good. And when do you expect some of these
BITs will be submitted to the Senate?
Mr. Abelson. Well, we always have high hopes but much of the
chance of progress relies on the other governments. We are hopeful
that after action on advice and consent on the eight that are before
you now, that we will have additional ones to supply you next year.
We are always hopeful.
Mr. Tarullo. Mr. Chairman, my understanding is that there are
no negotiations which are on the verge of completion right now.
The Chairman. What have been the significant accomplishments,
in your view, of the BIT program?
Mr. Tarullo. Mr. Chairman, I believe the BIT program has been
significant, but I will also acknowledge to you at the outset that
it is difficult to isolate the effect that the BIT program has from
all the other factors which affect investment, foreign direct invest-
ment in a particular country. But let me try to explain why, at
12
least at a qualitative level, I think the BIT program is important
and is an ongoing success.
First, as you know, Mr. Chairman, when companies are consider-
ing investments, one of the most considerations for them is the cer-
tainty of the rules which they will face once they put the money
into a particular distribution network or plant or any other kind
of investment. The guarantees which I mentioned in my opening
statement provide a substantial amount of certainty for those com-
panies and provide an international arbitration forum for them
should they have a dispute with the host countries.
Through our conversations with various business groups, includ-
ing those two which you mentioned in your opening statement, and
through our consultations with the advisory committees that are
operated by the Department of State and the Office of the U.S.
Trade Representative, we continually get support and reinforce-
ment from our businesses to the effect that this kind of certainty,
this kind of rule-based approach is important to them. It provides
an additional level of certainty and protection from expropriation,
from restrictions on transfer, from discriminatory treatment,
among others.
Second, if I may return for a moment to the situation of the
countries of the former Soviet Union and some of the East Euro-
pean countries, I think there we see another kind of benefit. These
countries, as you know, Mr. Chairman, do not have legal and com-
mercial institutions of any sort that resemble what we in the Unit-
ed States, or in Europe, or in many parts of Asia have come to ex-
pect and rely upon. They are just getting started in creating insti-
tutions within which a market economy can operate.
There is a — it is not so much a problem of what the rules are,
as a complete absence of rules in some instances because so much
was done by decree. In these cases, the negotiation of the BIT's
provides some first legal building blocks for the investment in eco-
nomic circumstances and climate of those countries, and thus it
provides very important protections to our potential investors in
the short term. I think in the medium term it also moves those
countries along the road toward a more sophisticated set of market-
based institutions, which will also redound to the benefit of our
companies in the future.
We have, in response to the questions from the committee, Mr.
Chairman, provided you with data on investment flows to the coun-
tries whose BITs the Senate has given its advice and consent.
What you will see is the flows go up and down, and that really gets
back to my first point which is investment in a country, in a for-
eign country, is a decision by a private company based on a whole
set of considerations: economic growth potential of the country, the
political stability, and the existence of certain rules on which they
can rely. We believe the BIT program contributes to that third
among other factors, and thus we think it is important to continue.
The Chairman. Is there any evidence to suggest that increased
investment as a result of the protection provided by these treaties
might be able to reduce the direct U.S. foreign assistance?
Mr. Tarullo. Well, Mr. Chairman, I do not know that there is
direct evidence that can link the two. Once again, it is hard to iso-
late the variables. But what I will say is that it is essential for
13
these countries that they create environments in which investment
is welcome. Because we all know that even foreign assistance at
higher levels than are possible today in the United States and
throughout the world, are not going to be adequate, anywhere close
to adequate to meet the development needs of these countries.
Not only do they need capital coming into those countries, but
they need to have the business environment in which that capital
will be productive, will produce growth. And an investment climate
in which companies from the United States and other developed
countries find opportunity is an economy that has some growth po-
tential.
The Chairman. Thank you. The treaties with Armenia,
Kazakhstan, Kyrgyzstan, Moldova, and Romania have provisions to
assist American investors with the transition from a centrally con-
trolled nonmarket economy. Could you explain how this helps
American investors and why there are these differences? I under-
stand some of these countries have set up special offices to help
American investors.
Mr. Tarullo. That is correct, Mr. Chairman. And I think you
rightly point to a special feature of some of these treaties with for-
merly state-controlled economies. Elaborating a bit on the point I
made earlier, the institutions for a market economy do not exist.
Not only don't the institutions of a legal code exist, but in many
instances the operation of a market for renting office space, for ex-
ample, does not exist. And for getting oneself linked up to public
utilities if you are coming in as a new investor, that does not exist.
So it has been the judgment of the executive branch that inclu-
sion of special so-called doing-business provisions in treaties with
countries moving away from state control toward market orienta-
tion are an important complementary element of the BIT which
further facilitates investment by U.S. investors which choose to
make it.
The Chairman. I thank you very much indeed, and there will be
some further questions that will be submitted to you. The record
should stay open for at least 3 working days for the submission of
any questions by any of my colleagues who would choose to.
And I do hope you would take back with you, as I mentioned ear-
lier, the desire on our part that you send up soon the human rights
treaties on racism, women's rights, and the American Convention
and the Covenant on Economic, Social, and Cultural Rights.
Mr. Tarullo. Mr. Chairman, with respect to your former point,
of course we will answer any questions you or your colleagues may
have. With respect to the latter point, I will communicate it to the
appropriate authorities in my Department.
The Chairman. Well, aren't you the appropriate authority?
Mr. Tarullo. Not for the human rights or women's rights issues,
Mr. Chairman. But I will speak to the appropriate assistant sec-
retary.
The Chairman. Right, good. Well, I thank you very much indeed
and again apologize for the delay, and the hearing is adjourned.
[Whereupon, at 11:15 a.m., the hearing adjourned, to reconvene
subject to the call of the Chair.]
72-456 0-93-2
APPENDIX
Statement of Jerry J. Jasinowski, President of the National Association of
Manufacturers
Dear Mr. Chairman: On behalf of the National Association of Manufacturers, I
urge prompt and favorable action by your committee and by the full Senate in the
matter of ratifying U.S. bilateral investment treaties with Argentina, Bulgaria and
Romania. We understand that a number of additional treaties may also he submit-
ted, primarily with certain former Soviet republics in Central Asia and with certain
nations in South America. We would equally support ratification of these treaties,
if they are submitted at this time.
The NAM has supported the U.S. bilateral investment treaty program from its in-
ception. These treaties provide critical legal protection for U.S. investments and
trade interests in signatory host nations. Foreign affiliates of U.S. companies re-
main our best export customers; the United States maintains a surplus in trade re-
lations with such affiliates, as opposed to our continued overall trade deficit.
All of the treaties that will be reviewed by the committee follow the general U.S.
model in providing:
• National treatment of investors in accordance with international law, and
including- refraining from imposition of trade-restricting performance require-
ments;
• Protection of U.S. intellectual property rights;
• Establishment of agreed restraints on any future expropriations or nation-
alizations, including payment of prompt, adequate and effective compensation;
• Establishment of agreed dispute settlement procedures, including timely
access to international arbitration;
• Guaranteed right to repatriate earnings and to pay for imports of machin-
ery and other imports in convertible currency. This provision is especially im-
portant in supporting the ability of U.S. companies to expert U.S.-made prod-
ucts to their affiliates, since foreign governments frequently cite balance 01 pay-
ments and other problems as an excuse to deny investors the right to exchange
currency freely for the purpose of importing equipment and materials.
While the NAM supports this entire program and all treaties under consideration
for submission at this time, we believe that the bilateral investment treaty with Ar-
gentina is especially significant. Argentina has long maintained an inward-looking
"import substitution" economic model, characterized by high tariff rates, high levels
of government ownership or control of industry and discouragement of foreign in-
vestment and imports. This system was a model for much of America.
The Argentinian system is now being liberalized, with substantial benefits for
U.S. industry and U.S. exporters, as well as, of course, for the living standard of
Argentina's citizens. In 1988, U.S. exports to Argentina were barely $1 billion, and
the U.S. deficit in trade with Argentina was almost $400 million. Last year, our ex-
ports were $3.2 billion, and the U.S. trade surplus with Argentina was $2 billion.
An estimated 40,000 jobs have been created in the United States due to this in-
crease in exports to Argentina. This turnaround is clearly linked with growing U.S.
investment: direct U.S. investment has inch from $2.2 billion in 1989 to $3.4 billion
by the end of 1992.
But the growth of U.S. exports to Argentina has only kept pace with the growth
of exports from our competitors in Europe to Argentina. We need to maintain and
improve our competitive position, and this would be assisted by the proposed treaty.
Moreover, it is important that we encourage continued policies of reform and eco-
nomic liberalization in Argentina, which will lead to a sounder economy, greater
support for democracy and a higher standard of living for the Argentinian popu-
lation. And far from being a model of authoritarian political and economic policies,
Argentina is now becoming a model of economic reform in South America. U.S. rati-
fication of this treaty, we believe, will encourage political developments favorable to
(15)
16
Argentina, as well as economic results favorable to U.S. exports. At the NAM, we
also believe that this will be true for the other bilateral investment treaties being
considered in this package.
Statement of the United States Council for International Business
The United States Council for International Business strongly supports prompt
ratification of the bilateral investment treaties (BITs) currently before the Senate.
These treaties represent a continuation of the United States' highly successful BIT
program, and their ratification will help ensure that U.S. investors in each of the
countries in question are treated fairly through legal and administrative regimes
that facilitate free investment flows and guarantee basic protection for investor
property.
The United States Council for International Business is an organization of some
300 leading U.S. companies, service firms, and associations. Dedicated to promoting
an open system of world trade, finance, and investment, it represents American
business views in the major international economic institutions and before the exec-
utive and legislative branches of the U.S. Government. Through its status as the
U.S. member of the International Chamber of Commerce (ICC), the Business and
Industry Advisory Committee to the OECD (BIAC), and the International Organiza-
tion of Employers (IOE), the Council is the U.S. business organization that officially
consults with the United Nations system, the GATT, the OECD, and the ILO. The
Council has strongly supported the U.S. Government's bilateral investment treaty
program and has provided U.S. negotiators with private sector views on a regular
basis.
The economic benefits of private foreign investment — including access to new cap-
ital, new technologies, and new and better products — are well-documented, and such
investment is widely recognized as an important engine for worldwide economic
growth. Investment abroad by American firms contributes significantly to U.S. ex-
ports and to our competitiveness in general — as illustrated by an important recent
study by the Emergency Committee on American Trade (July 1993 ECAT report,
"Mainstay II: A New Account of the Critical Role of U.S. Multinational Companies
in the U.S. Economy"). Moreover, with official development assistance from the in-
dustrialized countries scarce, private foreign investment will provide the main
source of international capital flows and technical expertise to the developing and
formerly communist countries over the coming years. U.S. investors are well-placed
to take advantage of these new opportunities, provided that the basic international
environment for foreign investment continues to be one of openness and fair treat-
ment.
Bilateral investment treaties are an important means of securing such an open
and fair environment. The U.S. Council fully supports the U.S. BIT program, and
welcomes the progress achieved thus far by U.S. negotiators. Given the importance
of BITs to U.S. investors abroad, we are pleased that the new Administration has
wisely chosen to continue the vigorous efforts of previous Administrations in this
field.
By establishing basic legal principles for the protection of foreign investment,
BITs improve investors' confidence in the investment climate in a host country,
which when combined with positive economic conditions encourages foreign invest-
ment in that country. The more than 400 such treaties concluded thus Tar by all
governments worldwide illustrate that BITS are recognized by most countries as an
important tool for promoting and protecting foreign investment.
The United States began its BIT program during the late 1970s and early 1980s,
after European states originated the concept, and much has been accomplished in
this relatively short period of time. Treaties have been completed (or are in the final
stages of negotiation) with virtually all the formerly communist states of Eastern
Europe and Central Asia, along with a number of countries in Latin America, Afri-
ca, and Asia. U.S. BITs are among the very best in the world in terms of explicit
commitments imposed on governments in their treatment of foreign investment. Un-
like the broader friendship, commerce, and navigation (FCN) treaties that the U.S.
used in the past, BITs address themselves exclusively to investment issues and pro-
vide greater assurances to the investor. They incorporate five basic features:
• A very broad definition of what constitutes investment, covering numerous
areas of importance for U.S. companies, including explicit recognition of intellec-
tual property as a form of investment to be protected.
• Establishment of agreed dispute settlement procedures, allowing investors
to bring disputes directly to binding third-party arbitration. This is the most
valuable of the BIT provisions for promoting investor confidence.
17
• Treatment of foreign-owned investment on a most-favored-nation basis and
on terms no less favorable than those applying to locally-owned investment.
• The right of the investor to make all transfers related to an investment
without restriction.
• Explicit recognition of clearly defined international law standards in cases
of expropriation or nationalization, and in the payment of compensation for
such actions.
U.S. BIT negotiations have provided a practical forum for dialogue on investment
policy with developing countries and those in transition from centrally planned
economies. This dialogue has had the beneficial effect of helping to secure effective
reversal of many deleterious developing country policies and practices with respect
to foreign investment.
To cite a relevant example from the treaties now before the Senate: the treaty
with Argentina commits that country to respect for the settlement, at the investor's
initiative, of disputes between the private investor and the host country via inter-
national arbitration. Argentina is to be complimented for its positive attitude to-
wards such third-party dispute resolution and to reconciling this approach with its
internal legal order. This is but one of many successes the U.S. BIT program has
achieved in creating a more investor-friendly climate abroad, and we are confident
that further such advances will result from continued negotiations.
More broadly, BIT negotiations and the constructive dialogue they promote have
contributed greatly to the emergence of an international consensus on the fun-
damental standards of investment policy. Although some countries still resist this
consensus, bilateral negotiations are an excellent means of locking in key host coun-
tries and of contributing to the development of a more effective international legal
framework in the investment field.
The proinvestment consensus which the U.S. has helped to foster is reflected in
numerous multilateral forums, including the GATT Uruguay Round negotiations
over trade related investment measures, the European Energy Charter negotiations,
and, of course, the agreed text of the proposed North American Free Trade Agree-
ment— which would in essence establish a trilateral investment agreement between
the U.S., Canada, and Mexico. The Council is hopeful that the advances made bilat-
erally by the U.S. can be further translated into effective multilateral disciplines
over government treatment of foreign investment.
These treaties represent substantial advances in the protection of U.S. private in-
vestment in several countries that are, or have the potential to be, important host
states for American investment. Given the inherent value of such treaties to U.S.
investors, we believe the U.S. should continue its aggressive negotiating strategy
and avoid linking such negotiations to other, nonrelated issues. We urge the Senate
to ratify these treaties swiftly, and we further recommend that the Administration
and Senate work together to ensure prompt attention to additional BITs either al-
ready signed or in the final processes of negotiation.
Statement of Joel W. Messing
INTRODUCTION AND BACKGROUND
As an individual citizen of the United States, I support our Government's Bilat-
eral Investment Treaty program and the investment treaties now before the Senate.
I have been an international lawyer and businessman for more than 20 years. I
had the privilege of studying international economics and law and conducting re-
search on the economic development of underdeveloped nations. My professional ca-
reer has involved investment issues in countries representing a wide spectrum of
development.
BILATERAL INVESTMENT TREATIES
International investment is a critical foundation for economic strength — global
economic strength and American economic strength. International investment stim-
ulates economic activity: new enterprises, new jobs, profits, savings, and further in-
vestment— in the United States ana abroad. External investment by American busi-
ness interests will stimulate the growth of countries which are markets for our ex-
ports. Inward investment by foreigners will create jobs in America and reduce im-
ports to America. For better or worse, global economic strength and American eco-
nomic strength have become interdependent, and this interdependence will deepen
in the 21st century.
With national economies becoming more globally interdependent, with economic
borders becoming more porous, with telecommunications becoming more widely in-
stantaneous, a strong, reliable, legal infrastructure for international investment is
18
essential if investments are to flow unimpeded in response to market forces. Unless
and until a satisfactory multilateral investment regime is developed, bilateral in-
vestment treaties will continue to form the backbone of this legal infrastructure.
For more than a century, the United States has entered into Treaties of Friend-
ship, Commerce and Navigation, primarily with European states, to protect the ex-
pansion of trade and shipping and to encourage United States investment abroad
by prescribing the treatment to be given to nationals of the contracting parties re-
garding the establishment and protection of investments. These classic treaties of
Friendship, Commerce and Navigation are the forebears of modern treaties concern-
ing the encouragement and reciprocal protection of investment, commonly referred
to as "bilateral investment treaties."
Since World War II, highly industrialized countries and developing countries have
found common ground in the utility of bilateral investment treaties. Developing
countries, seeking to import capital as a lever for economic development, have en-
tered into bilateral investment treaties in order to induce capital-rich countries to
invest there. Many developing countries have requested negotiations leading toward
a bilateral investment treaty with the United States. These countries recognize that
rational American investors are unlikely to invest scarce capital in the absence of
a law-based regime under which the treatment of their investments is fair, predict-
able and enforceable.
FAVORABLE TREATY PROVISIONS
Our Government, acting with the advice and support of the business community,
has developed a modern prototype bilateral investment treaty which has gained
wide international acceptance and become the standard against which other inter-
national investment treaties and guidelines are measured. This prototype contains
a variety of provisions which are designed to ensure the treatment of cross-border
investments in accordance with criteria which responsible American business man-
agers expect. The most important provisions are:
1. Investment is broadly defined and includes intellectual property — a subject
which remains unresolved and hence unprotected under the General Agreement
on Tariffs and Trade.
2. The right of entry and establishment, subject to agreed exceptions for spec-
ified industries.
3. National treatment or most favored nation treatment, whichever is more
favorable to the investor.
4. Prohibition of arbitrary or discriminatory measures and of performance
and local content requirements.
5. Transparency of local investment regulation to ensure due process of law.
6. Protection against discriminatory or private purpose expropriation and, in
case of expropriation, payment of "prompt, adequate and effective compensa-
tion."
7. Freedom to make cash transfers in and out, including the realization of re-
turns and the recovery of an investment which has been sold or liquidated.
8. Binding arbitration of disputes.
9. Freedom of each country to tax investments and investment returns fairly
and equitably and to protect its own essential security interests.
Two points bear elaboration. Each country may carve out exceptions for specific
industries through an annex to the treaty. Thus some pure protectionism survives
in an otherwise liberal investment regime. And each country may protect its na-
tional security through "necessary measures," such as section 71 (the Exon-Florio
provision) of the Defense Production Act of 1950.
ECONOMIC POLITY CONCERNS
It is natural to inquire whether and why the United States should promote invest-
ment by Americans in other countries when our domestic investment needs are so
great. The question, thus framed, suggests a non sequitur: that bilateral investment
treaties, by developing a reliable infrastructure for international investment, are
somehow antithetical to domestic investment. However, if we believe in free enter-
prise, if we believe that free market forces will direct investment capital to the high-
est returns, and if we also believe in the vitality and productivity of American labor
and capital, then there is no inconsistency between the development of a legal re-
gime for international investment and the allocation of investment capital to domes-
tic uses.
By providing reciprocal protection, bilateral investment treaties ensure a free
market, consistent with American economic and political traditions. With these trea-
19
ties in force, rational investment decisions can then be made by private enterprises,
not by governments.
CONCLUSION
The United States has long emphasized the virtues of an open investment policy
that creates a hospitable climate for foreign capital. The logic of this position has
been proven by the virtual stampede of newly liberated Central European and East
European countries toward market economies which invite foreign capital to spur
development and by the flow of foreign capital into the United States when market
conditions warranted. To retreat now from free market principles would undermine
our moral position, shake the confidence of other nations in the stability and fair-
ness of American foreign policy, and threaten the very infrastructure we have la-
bored so arduously to create. To support free market principles as applied to inter-
national investment is to take the nigh road and to demonstrate confidence in the
ability of our economy to grow through both domestic and foreign investment oppor-
tunities.
For all the foregoing reasons, I support our Government's Bilateral Investment
Treaty program. Accordingly, I urge you to recommend that the U.S. Senate advise
and consent to the ratification of the bilateral investment treaties before you.
Statement of Ambassador Charlene Barshefsky
The office of the United States Trade Representative is pleased to submit written
testimony with respect to the eight bilateral investment treaties (BITs) submitted
for the Senate's approval. We are gratified that these treaties are moving toward
ratification, as the BIT program is an important component of U.S. trade and over-
all economic policy. We hope that these treaties, with Argentina, Armenia, Bulgaria,
Ecuador, Kazakhstan, the Kyrgyz Republic, Moldova and Romania, can be brought
quickly into force.
Following letters in 1977 from Senators Claiborne Pell and Frank Church, this
program was initiated in the late 1970's and the first negotiations were held in
1980. The first prototype tea was completed in 1982 — the same year that the first
agreements were signed. Finally, the first treaties were brought into force in 1989.
Over this period, we have worked closely with representatives of the private sec-
tor, particularly through the Investment Policy Advisory Committee to the United
States Trade Representative and the interested Industry Sectoral Advisory Commit-
tees to the Secretary of Commerce and to the USTR and also through the Advisory
Committee on International Investment. The treaties incorporate the advice on pol-
icy received from these and many other private sector groups. The investment policy
issues involved have been the responsibility of USTR's interagency committee — with
the negotiation of each of the submitted BITs cochaired by USTR and State, actively
supported by Commerce and Treasury.
Since this program was initiated, the role of international investment in the glob-
al economy has steadily strengthened. Foreign direct investment in the inter-
national economy is growing rapidly; from 1980 to 1990, real foreign direct invest-
ment grew 11 percent annually — versus 4 percent annually for trade and 3 percent
for GDP. Foreign direct investment has become a vital form of economic activity,
channeling financial and human resources throughout the world.
The U.S. plays a key role in this process since it is the world's leading home and
host country for international investment. The stock of foreign direct investment in
the U.S. nearly quintupled in the 1980's to $420 billion in 1992. Similarly, US direct
investment abroad stood at $487 billion at year-end 1992, growing at an average
of 9 percent annually since 1982.
Looking at the role of U.S. investment abroad, exports are now a key source of
employment and growth in America. Every billion dollars of U.S. exports meant
nearly 19,000 domestic jobs in 1990 — we now have over seven million export-related
jobs in America. In fact, one in every six manufacturing jobs in America is related
to exports. The average wage for these export-related jobs is 17 percent higher than
the U.S. national average. Since 1987 growth in exports has generated more than
half our GDP growth.
Investment is providing a key motor for this export growth. While trade and for-
eign investment were traditionally seen as alternative means of penetrating foreign
markets, they are now understood to be integral elements of a firm's strategy for
maximizing global production efficiencies. Growth in exports by U.S. parent firms
to their affiliates has recently averaged 10 percent per year — coming to constitute
$115 billion, 27 percent of all U.S. exports, in 1991.
Based on the fact that foreign and domestic investment promote trade, stimulate
economic growth, create jobs, and foster competition ana consumer welfare, the
20
United States has championed the cause of liberal, transparent foreign investment
regimes. As the most important source and recipient of foreign investment, the U.S.
has a critical stake in investment climates both here and abroad.
U.S. investment policy starts from the principle of national treatment with limited
sectoral exceptions. Those exceptions generally derive from national security, e.g. in
transportation and communications. This principle protects foreigners from general
"screening" of their investments in the U.S. In addition, the U.S. provides freedom
from performance requirements — no mandatory local content, export or technology
transfer requirements. The United States allows free transfers of investment-related
funds and maintains standards for expropriation that meet or exceed international
norms. Finally, foreign investors are provided access to international arbitration to
resolve investor-state disputes. All U.S. Bilateral Investment Treaties (BITs) provide
for international arbitration at the investor's choice.
The President stated in his speech to the American University that, "We welcome
foreign investment in our businesses, knowing that with it [comes] new ideas as
well as capital * * * But as we welcome that investment, we insist that our inves-
tors should be equally welcome in other countries." This insistence is embodied in
three concepts reflected in the prototype BIT.
First, American property overseas should be afforded fair and equitable treat-
ment, including those standards required by international law. Property should only
be taken in accordance with due process of law, for a public purpose and in a non-
discriminatory manner. In such a case, the investor should be provided prompt, ade-
quate and effective compensation. An American investor in a foreign country should
be accorded full protection and security — and not be hindered by arbitrary or dis-
criminatory measures.
Second, American investors should have full access to foreign markets. Clearly,
Brohibitions on, and discrimination against, U.S. investment impedes competitive
f.S. companies in their global operations. Similarly, once a U.S. company is operat-
ing in a foreign country, restrictions on free transfers are a handicap in maximizing
competitiveness. Foreign royalties, for example, may be critical to a smaller com-
pany trying to exploit world-class technology on a world-wide basis. Even large U.S.
multinationals cannot indefinitely justify to their domestic shareholders profits
blocked abroad.
Finally, foreign restrictions on investment must not result in agreements with pri-
vate investors that damage overall U.S. competitiveness. The argument for free
flows of investment and trade stems from the welfare gains arising from a more effi-
cient and competitive supply of goods and services. Through general performance re-
quirements, and through screening "according to the national welfare," countries
distort such flows. By forcing local purchases by investors, for example, many coun-
tries have traditionally kept U.S. suppliers from the benefits of additional sales,
greater economies of scale, and exposure to new markets. Even when the investor
is able to accommodate such demands, these local content, export performance and
technology transfer requirements appropriate U.S. jobs and know-how. We were suc-
cessful in eliminating such measures in Mexico, through the Investment Chapter of
the NAFTA, and we expect to achieve like results with other negotiating partners.
President Clinton stated in his transmittal of the recent BIT treaties that they
will establish an agreed-upon basis for the protection and encouragement of invest-
ment. The BIT Program is thus a successful and important element of our inter-
national investment agenda. But we have several other efforts underway with re-
spect to this investment agenda. The investment chapter of the NAFTA goes even
further in some respects than the BIT, greatly liberalizing our trading partners' in-
vestment regimes. Among the industrialized countries, the U.S. currently relies on
the Capital Movements Code of the OECD to bind the right of establishment. The
United States also supports the OECD's conducting of a feasibility study for a com-
prehensive, binding multilateral investment agreement, known as the "Wider Invest-
ment Instrument"; any new instrument will have to incorporate the principles of our
BIT on right of entry, post-establishment protections (including performance re-
quirements) and dispute settlement. With respect to others' regional arrangements,
we are working to ensure that integration efforts are not completed in a way that
disadvantages U.S. interests — for example, through investment liberalization imple-
mented on a non-MFN basis. With respect to the Uruguay Round TRIMs negotia-
tions, we expect that baseline standards on local content and trade balancing re-
quirements will be established; such an agreement will benefit the U.S. economy by
automatically prohibiting these practices. Finally we are addressing investment is-
sues with several trading partners, including Japan, in bilateral fora.
The tenets reflected in these negotiations follow Congressional actions in drafting
U.S. trade laws. Section 301 of the Trade Act of 1974 nas been amended to clarify
that its coverage extends to foreign investment practices — such as restrictions on eq-
21
uity ownership, transfers, or local content — related to trade in goods and 'services.
Legislation renewing the Generalized System of Preferences (GSP) also contains
provisions reflecting such concerns, particularly with respect to expropriation and
to equity ownership. Section 307 of the Trade and Tariff Act of 1984 established spe-
cific authority for the USTR to deal with export performance requirements, includ-
ing retaliation, if necessary.
In conclusion, it should be emphasized that the BIT program is still in its early
stages; more than a dozen other treaties are under negotiation and many more
countries have expressed interest. Such agreements, with their high standards of
protection and treatment, lend credibility to our efforts in every fora to achieve
these high standards, assist countries in their domestic reforms and in achieving
market-led growth, and promote U.S. exports and jobs. We would ask that the Sen-
ate give its advice and consent to ratification of these treaties as soon as possible.
Responses of U.S. Department of State to Questions Asked by Senator Pell
SUCCESS OF THE BIT PROGRAM
CURRENT OBJECTIVES OF CLINTON ADMINISTRATION
Question. What are the current objectives of the Clinton Administration with the
Bilateral Investment Treaty program?
Answer. The BIT program is one element of the Administration's overall inter-
national economic policy, which has as its key aims the promotion of U.S. exports
and the enhancement of international competitiveness of U.S. companies. The basic
aims of the BIT program itself are:
— To provide protection for U.S. investment abroad, especially in regard to: treat-
ment that does not discriminate on the basis of nationality either on or after estab-
lishment; performance requirements; hiring; expropriation; transfers associated with
an investment; and international arbitration of investor-state disputes.
— To encourage adoption of market-oriented domestic policies that would treat pri-
vate investment fairly, and thus allow foreign and domestic private investment to
play a full role, consistent with market forces, in development.
— To support development of international law standards consistent with the pre-
vious two objectives and with our long-held position on the protections afforded for-
eign investors under international law.
In negotiating BITs, the U.S. is careful to point out that the existence of a BIT
alone wfll not guarantee increased investment.
SIGNIFICANT ACCOMPLISHMENTS
Question. What have been the significant accomplishments or successes of the BIT
program?
Answer. The BITs signed with members of the former Soviet Union (Russia, Ar-
menia, Kazakhstan, Kyrgystan, and Moldova) as well as with members of the
former Soviet bloc (Bulgaria, the Czech Republic, Slovakia, Romania, and the Busi-
ness & Economic Agreement with Poland), are historic: formerly centrally-planned,
communist dictatorships, closed to foreign investment, have signed agreements that
embody liberal and transparent foreign investment principles.
The BIT signed with Argentina is an important milestone in our relations with
South America. Like many South American countries, Argentina has long sub-
scribed to the Calvo Doctrine (named after a 19th century Argentine jurist). The
U.S. Argentina BIT, which provides investors the absolute right to international ar-
bitration for the resolution of investment disputes, removes U.S. investors in Argen-
tina from the Calvo Doctrine requirement to submit disputes arising there only to
local courts. This treaty should help pave the way for similar agreements with
other states in the region.
In addition, our BIT talks have coincided with, and in part influenced, efforts of
several of our negotiating partners to reformulate laws ana regulations with an aim
to more fully join the world market system. Our dialogues with countries in transi-
tion have reflected their relatively broad reviews of current regimes; with other spe-
cific policies have been more frequent topics.
We have also found that our steadily increasing number of BITs, setting the high-
est standards of bilateral investment protection, provide very important support to
U.S. positions in multilateral discussions. In our dialogues with the World Bank, the
United Nations, the Asia-Pacific Economic Cooperation (APEC) group, and the
OECD, and in our negotiations for an European Energy Charter we can point to
these bilateral standards as goals for our partners to achieve.
22
RELATIONSHIP BETWEEN BITS AND INVESTMENT LEVELS
Question. During the period since April of 1989, when the first bilateral invest-
ment treaties entered into force, has the Administration seen an increase in U.S.
investment in the countries involved?
Answer. In negotiating BITs, the U.S. is careful to point out that, while a BIT
offers U.S. investors increased security, the existence of a BIT alone will not guar-
antee increased investment, as private sector investment decisions are made in re-
sponse to a variety of factors in a free market.
The U.S. direct investment position in each of the BIT countries for 1988-92 may
be found in Table 1, on the following page; In some cases (e.g., Morocco, Panama,
Turkey), a BITs entry into force seems to take place amidst a generally upward
trend of U.S. direct investment. In others, (e.g., Senegal and Zaire), investment has
decreased. The changes in investment levels in these countries resulted from a vari-
ety of factors. In some cases investors may have reacted favorably to statutory or
regulatory changes governments took to bring their investment regimes into line
with the BIT principles. In other cases, investors may have reacted to changes in
political or economic conditions. In any case all of the treaties have only recently
entered into force, and it would be premature to draw any definitive conclusions.
Table 1. — U.S. Direct Investment in BIT Countries Historical Cost Position:
1988-1992
(In millions of dollars]
Year
1988
1989
1990
1991
1992
Bangladesh
Cameroon
Czech & Slov Reps.
Egypt
Grenada
Morocco
Panama
Senegal
Sri Lanka
Tunisia
Turkey
Zaire
13
236
6
P)
1,637
1
26
6,874
29
13
17
246
90
1,541
(')
35
8,913
16
10
38
343
60
7
P)
(')
1,226
1
49
9,257
19
12
42
515
26
33
P)
P)
1,239
1
57
10,427
19
7
46
529
32
42
261
P)
922
2
76
11,457
13
9
33
705
28
Total SIT
9,182
10,962
11,154
12,390
13,548
i Less than $500,000 (+,-)
2 Suppressed to avoid disclosure of data of individual companies.
Technical note: The Bureau of Economic Analysis recently revised its estimates of the direct investment position for 1989-91 to incorporate
information from its 1989 benchmark survey.
Source: US. Department of Commerce, Bureau of Economic Analysis
RELATION OF INCREASED INVESTMENT TO U.S. FOREIGN ASSISTANCE
Question. Is there any new evidence to suggest that increased investment, as a
result of protections provided through these treaties, will or could result in a reduc-
tion in direct U.S. foreign assistance over a period of time with respect to the coun-
tries involved?
Answer. In negotiating BITs, the U.S. is careful to point out that the existence
of a BIT alone will not guarantee increased investment. Private sector investment
decisions are made in response to a variety of factors in a free market; the BITs
address only elements of how the investment is treated by the government. Other
factors affecting investment decisions include the political stability of the host coun-
try; the economic, industrial and administrative framework, particularly whether
the country has adopted sound, market-oriented policies; intellectual property pro-
tection and tax regimes; and, most important, the probable profitability of the in-
vestment. Thus, while a BIT offers U.S. investors increased security, it may not be
sufficient to cause an investment to take place.
Since a BIT in and of itself lay not result in increased investment, it is not pos-
sible to claim that a BIT will lead to a reduced need for U.S. assistance. However,
at a time of increased demand and competition for foreign assistance worldwide, it
is vitally important for developing countries to attract foreign direct investment,
which has been the single largest component in international resource flows to de-
veloping countries over the last five years. A BIT is an important part of the eco-
nomic reform needed to attract private capital.
23
PROTECTION OF U.S. INVESTORS
Question. Do BITs actually provide United States foreign investors with more pro-
tection? Please supply examples of a United States company's use of BIT provisions
to protect an investment.
Answer. A Bilateral Investment Treaty (BIT) affords important protections to U.S.
investors in several ways. While the other country's investment regime would ordi-
narily be consistent with the Treaty at the time a BIT is concluded, a BIT can, as
a matter of domestic law in the other country, serve to improve the actual treatment
of investment. (One common example would be access to, and enforcement of awards
arising from, international arbitration.) Moreover, investors are deeply interested in
the stability of the investment regime, particularly once they've made their invest-
ment. The BIT binds key elements of the investment regime— such as free transfers,
full compensation in case of an expropriation, and no discriminatory forced
divestitures. And the BIT underwrites these bindings with effective dispute settle-
ment provisions.
One investor, in Zaire, has made use of the international investor-state dispute
settlement mechanism (discussed infra).
EXPERIENCE WITH BITS— STATUS OF ZAIRE CASE
Question. Between 1988 and 1992, the Senate has given its advice and consent
to the ratification of fifteen bilateral investment treaties. What has been the experi-
ence with these treaties? What is the current status of the BITs operation in Zaire?
Answer. We have found the thirteen (13) U.S. BITs in force to be valuable tools,
both for the U.S. investor and the U.S. government, to insure that our BIT partners
protect U.S. investment. In two cases (Panama and Zaire), the U.S. government has
been notified by U.S. investors of potential BIT violations, and in both cases the
U.S. Embassy in the host country made demarches to the host government. In one
case, the Panamanian government stopped the offending practice.
The investor-state dispute in Zaire was recently submitted to ICSID for arbitra-
tion. An arbitral Tribunal has been constituted to hear the case. The panel will
begin its deliberations after all the presentations have been made. We understand
that this process has been made more difficult by the fact that, due to political in-
stability Zaire, the government of Zaire is not participating in the case. However,
the Zairian government's absence does not bar the case from proceeding to an
award.
BIT NEGOTIATION PROCESS
CRITERIA FOR NEGOTIATING A BIT
Question. When selecting countries to approach for an indication of interest in ne-
gotiating a BIT, what criteria or set of factors does the Administration employ?
Answer. Support for market-oriented domestic policies that treat private invest-
ment fairly is an integral part of our general economic agenda; in such discussions,
reference to our Bilateral Investment Treaty (BIT) program can be useful. The BIT
program is also regularly noted in our trade dialogue with a variety of countries,
including those in transition and those with which Trade and Investment Councils
(or similar arrangements) have been established.
In deciding to open formal BIT negotiations, the U.S. weighs a variety of business,
economic and foreign policy criteria. However, the most important criterion is the
willingness and ability of the country to undertake BIT obligations.
AGENCIES RESPONSIBLE FOR BIT NEGOTIATIONS
Question. Who in the Clinton Administration is responsible for setting the objec-
tives and implementing the BIT program? Please submit their names and current
responsibilities.
Answer. Negotiation of each of the BITs under Senate consideration was co-
chaired by the Office of the United States Trade Representative (USTR) and the De-
partment of State, with the active assistance of the Commerce and Treasury Depart-
ments. Other agencies, including the Departments of Energy and Justice, and the
Overseas Private Investment Corporation (OPIC) have participated in negotiations
of particular interest to them.
The investment policy issues involved in the negotiation, implementation and re-
view of BITs fall within the jurisdiction of the USTR-chaired Trade Policy Review
Group (TPRG), with first line policy development and coordination responsibilities
residing with the Trade Policy Staff Committee (TPSC) and its Investment Sub-
committee. In addition to the agencies named above, the TPRG/TPSC constituency
24
included Agriculture, CEA, Defense, Interior, Labor, NSC, OMB, and Transpor-
tation. Other agencies may participate as appropriate.
RESOURCES NEEDED FOR BIT NEGOTIATIONS
Question. Given the dramatic increase in the number of countries with which the
United States either has or plans to negotiate BITs, does the Clinton Administration
feel it has adequate resources?
Answer. The U.S. Government believes it has adequate negotiating resources to
serve its investment priorities.
INVESTMENT BARRIERS
BARRIERS IDENTIFIED IN ARGENTINA, BULGARIA, KAZAKHSTAN, AND ROMANIA
Question. In the process of negotiating the treaties with Argentina, Bulgaria,
Kazakhstan, and Romania, what investment barriers were identified in each of
those countries?
Answer. At the outset of our negotiations with Argentina, the U.S. side identified
several elements of the Argentine investment regime of concern — including the use
of performance requirements and the insistence on investors' exhausting local rem-
edies before proceeding to international arbitration. The U.S. side also sought to use
the BIT to preempt such possible impediments to U.S. investment as remittance
limitations (particularly with respect to royalties), other exchange controls, discrimi-
nation in granting mining concessions, and restrictions on foreign participation in
privatization.
Our concern with Armenia, Bulgaria, Kazakhstan, Moldova, and Romania was
aimed at guaranteeing an open investment climate in these economies in transition,
particularly with respect to free transfers. Because of the lack of hard currency in
these countries, U.S. investors wanted assurances that they would be able to repa-
triate their profits. We also wanted to ensure that as these countries formulated
their foreign investment and privatization plans, U.S. investors would be, to the
greatest extent possible, provided with the same treatment as nationals and as
other foreign investors.
INITIATION OF NEGOTIATIONS
Question. How were the BIT negotiations with these countries initiated?
Answer. We have distributed copies of our prototype BIT, noting its principal ele-
ments, to many countries pursuing economic reform, including all the newly emerg-
ing democracies of Eastern Europe and the former Soviet Union. Consistent with
our general approach, negotiation of each of the agreements now under consider-
ation was initiated, based upon the current U.S. prototype, following the other coun-
try's expression of interest in opening formal talks.
SELECTION OF COUNTRIES
Question. Why were these four countries chosen to negotiate a BIT?
Answer. In each case the country showed the willingness and ability to negotiate
a BIT with the United States.
The BIT with Argentina has proven a landmark; Argentina is the first South
American country to sign a treaty (FCN or BIT) to protect U.S. investors in this
century.
Treaties with Armenia, Bulgaria, Kazakhstan, Moldova and Romania were seen
as assisting those countries in their transition to a market economy by strengthen-
ing the role of the private sector and by encouraging appropriate macroeconomic
and structural policies.
Each of these BITs will serve to ensure essential elements of an open investment
climate for U.S. investors and so play a part in the overall framework of our trade
and economic relations.
STATUS OF U.S. RELATIONS WITH TREATY PARTNERS
Question. What is the status of United States diplomatic and economic relations
with each of these countries?
Will ratification of these treaties be interpreted as United States approval of the
policies of particular countries that the United States may oppose or disapprove of?
Answer. Relations of the U.S. with each of these countries are good.
A significant foreign policy problem with a country could prevent our asking for
Senate advice and consent to a BIT. Nevertheless, ratification of a BIT does not in-
dicate U.S. approval or acceptance of a country's policies outside the scope of the
25
agreement. Ratification of a BIT does signify that a country has accepted high
standards of legal protect ion and liberal treatment for U.S. investment.
STATUS OF OTHER TREATIES
CONGO, POLAND AND RUSSIA
Question. The Senate has given its advice and consent to BITs with Egypt, Pan-
ama, Senegal, Zaire, Morocco, Turkey, Cameroon, Bangladesh, Grenada, a business
and economic relations treaty with Poland which contains the BIT elements, Russia,
the Congo, Sri Lanka, Tunisia and the Czech and Slovak Republics. It is our under-
standing that each of these has entered into force except the ones with Poland, Rus-
sia and the People's Republic of the Congo. What have been the reasons for delay
in these countries.
Answer. The Polish treaty has not yet been brought into force because Polish law
on intellectual property protection has not yet been revised in conformity with the
terms of the treaty. The Russian Parliament has not yet ratified the Russian BIT.
Both the Republic of the Congo and the United States have ratified the Congo BIT;
it will enter into force upon exchange of instruments of ratification.
PROSPECTS FOR ADDITIONAL TREATD3S
Question. What are the countries with which the Administration is currently ne-
gotiating, or contemplating negotiating bilateral investment treaties?
Answer. In the past three years, formal talks have been held - with Barbados,
Belarus, Bolivia, Colombia, Costa Rica, Estonia, Hong Kong, Hungary, Jamaica,
Latvia, Lithuania, Mongolia, Nigeria, Pakistan, Peru, Turkmenistan, Ukraine, Uru-
guay, Venezuela, and Yugoslavia.
Informal discuss ions have been held with several other countries in recent years.
INTERNATIONAL ARBITRATION
BINDING INTERNATIONAL ARBITRATION
Question. In each of the treaties is binding international arbitration mandated or
is it merely an option for an investor to choose? Please explain how this provision
would be applied in each of the pending treaties. What are the similarities and dif-
ferences in each treaty with respect to this issue?
Answer. In each of the treaties, investors are given a choice among binding inter-
national arbitration, local courts and previously agreed-upon dispute solution proce-
dures, with the proviso that the choice of one precludes resort to the others. The
investor's choice is binding on the host state. The submittal letters of each treaty
describe the differences from our prototype.
EXPERIENCE WITH ARBITRATION
Question. What has been the Administration's experience with respect to the com-
pulsory arbitration provisions of the BITs?
Have there been any instances where disputes between United States investors
and foreign countries which are parties to a BIT have resulted in the use of these
arbitration provisions?
Answer. Experience with the arbitration provisions of the BITs has been limited;
our only experience has been a case in Zaire. Earlier this year, a U.S. investor in-
voked its right to pursue ICSID arbitration against the Government of Zaire. An
arbitral tribunal has been constituted, and is currently hearing the case.
Anecdotal evidence from investors in countries with whom we have a BIT in effect
suggests that the existence of the right of the investor to seek arbitration facilitates
the negotiated settlement of investment disputes.
WAIVING ARBITRATION RIGHTS
Question. Can an investor waive the right to arbitration?
Answer. The investor has the right to choose among several mechanisms to re-
solve disputes arising out of or relating to investment agreements, investment au-
thorizations or an alleged breach of a BIT. These mechanisms are local courts or
administrative tribunals, any previously agreed dispute-settlement procedure, or
binding international arbitration. Once the investor has submitted the dispute for
resolution via one of these mechanisms, the investor cannot pursue any other mech-
anism.
26
INTELLECTUAL PROPERTY RIGHTS
EXISTENCE OF SEPARATE IPR AGREEMENTS
Question. The treaties with Argentina, Bulgaria, Kazakhstan and Romania make
specific reference to intellectual property as an investment. Have separate intellec-
tual property rights agreements been entered into with these countries as executive
agreements/ If so, please describe the essential elements of those agreements and
submit copies with the response to these questions.
Answer. No separate intellectual property rights agreement was entered into with
Argentina. Comprehensive intellectual property rights protection is provided for in
the trade agreements with Bulgaria, Romania, and Kazakhstan. The agreements
with Bulgaria and Kazakhstan are in effect. The agreement with Romania is cur-
rently before the Congress for approval and we hope for passage of a joint resolution
to that effect in early fall.
NATIONAL OR MOST FAVORED NATION TREATMENT
POLICY OBJECTIVES
Question. Fundamental to each BIT is the national treatment principle, i.e., a
guarantee that investment will receive the better of national treatment or most fa-
vored nation treatment from the host government, subject to some specified sectoral
exceptions.
Please explain the policy objectives of this principle and how well it has operated
with BITs in force to accomplish those objectives.
Answer. The objective of the principle of national treatment is to ensure that U.S.
investments will not be discriminated against by the host government because they
are owned or control led by Americans rather than host country nationals, similarly,
the objective of the most favored nation (MFN) principle is to ensure that U.S. in-
vestment will receive the most favorable treatment accorded by the host government
to investments of any foreign nation. The BITs provide for the better of national or
MFN in like circumstances. The overall objective is to get the best possible treat-
ment for U.S. investors in the host country and to assure this treatment in a treaty
obligation. MFN provides a particularly important treatment floor in the sectors or
matters where a country reserves the right to deny national treatment, or where
there is no domestic investment at all.
The principle of the better of national and most favored nation treatment has op-
erated quite well with BITs in force. The private sector has expressed its satisfac-
tion with the operation of our treaties.
NATIONAL TREATMENT ON AND AFTER ENTRY
Question. How has the objective of national treatment at the point of entry as well
as thereafter, been achieved with respect to the pending treaties?
Answer. The three treaties with Argentina, Bulgaria, and Romania fully adopt the
principle of the better of national or most favored treatment both upon and after
entry.
GENERAL
CHANGES IN PROTOTYPE BIT
Question. What changes have been incorporated into the prototype BIT that would
vary from the February 1992 prototype treaty submitted to the Committee in Au-
gust of 1992?
If there have been changes in the prototype BIT of February 1992, please submit
to the Committee the revised version, together with an updated section by section
description (to supplement the July 30, 1992 version previously submitted to the
committee).
Answer. The February 1992 prototype treaty was the basis for most BITs submit-
ted to the senate. Any changes from the prototype BIT in a treaty were agreed to
in the context of that particular negotiation.
EFFECT OF CHANGES IN PROTOTYPE BIT
Question. What substantive changes in the prototype BIT have emerged from any
of the negotiations of the pending BITs? what effect do those changes have on the
BITs already in existence?
Answer. The current prototype BIT has not been substantively changed as a re-
sult of any of the negotiations of the pending BITs.
27
Under international law, a treaty must be interpreted in accordance with its own
terms, so the terms of a BIT continue to prevail between States notwithstanding
changes made in subsequent treaties with other States. At the same time, since all
of the treaties are based on a prototype text, a change in one treaty may result in
similar changes in future treaties, and consequently may influence interpretation of
a similar term in previous treaties.
DESCRIPTION OF TREATY VARIATIONS FROM PROTOTYPE BIT
Question. Since negotiations presumably commence with the prototype BIT, why
does the Letter of Submittal not contain detailed explanations on changes from, ad-
ditions to, or deletions from that prototype?
Answer. The Letters of Submittal for Argentina, Bulgaria and Romania each de-
scribe significant provisions which differ from some of the past BITs or which war-
rant special attention. Other changes in wording may exist in a BIT for reasons spe-
cific to the negotiation, perhaps to express a concept more clearly, but would not
be considered substantive changes.
Due to the Committee's interest, we expect that future BIT submittal letters will
g resent an explanation of the relevant similarities and differences between a specific
IT and the prototype BIT.
DEFINITION OF TERMS
Question. If a new term is employed in a recently negotiated BIT, would it not
be appropriate for that term to be defined in the treaty?
Answer. The answer to this question depends on the term in question. If the term
is one commonly used and understood in international law or investment or com-
mercial practice, for example, no definition may be needed. Another possibility is
that the term may already be adequately defined in another international agree-
ment or international law. On occasion, we expect terms to be applied depending
on the circumstances of the case.
DEFINITION OF "SUBSTANTIAL BUSINESS ACTIVITIES" AND "CONTROL"
Question. There has been some recent criticism as to certain terms not being de-
fined, such as "substantial business activities" and "control," as well as delineating
which party's laws would be used in making such determinations. Are any changes
in the prototype BIT planned to meet such criticism?
Answer. The terms "substantial business activities" and "control" have been left
undefined in the prototype BIT because these involve factual situations that must
be evaluated on a case-by-case basis. The U.S. government's position has been that
precise definition of these terms could be to the disadvantage of U.S. investors.
USE OF ANNEX OR PROTOCOL
Question. What would be the basis for a change in format from the prototype BIT?
For instance, the BIT with Argentina does not have an Annex, and the material
heretofore covered by an Annex is found in the protocol of that treaty. If an Annex
is not needed, why has it been used in the format of the Prototype BIT? Will it be
necessary to use it again?
Answer. An annex is not, as a legal matter, needed. The same legal effect has
been achieved using other formats in several treaties, including the BITs with Mo-
rocco, Tunisia, and Turkey.
In negotiations the U.S. seeks to have sectoral exceptions placed in an annex.
Nevertheless, for presentational or other purposes, the U.S. continues to be willing
to consider alternatives which are legally equivalent.
RETROACTIVITY OF BITS
Question. What is the necessity for the inclusion in some of these BITs of a provi-
sion declaring that the treaty is not binding on facts, acts or situations which ceased
to exist before entry into force of the treaty? Might one argue that those BITs which
do not contain such a provision may, by virtue of this specific inclusion in other like
treaties, that there is an intention that they may be applicable to just to situations?
In other words, since international law already provides for a presumption of
nonretroactivity, why would it be included in a series of treaties unless it is to offset
an implied intention of retroactivity?
Answer. Several of these BITs include a provision in the Protocol confirming the
mutual understanding of the Parties that the BIT does not apply retroactively. This
language merely restates the international law principle of nonretroactivity of trea-
ties. This provision was added, in each instance, due to a specific request from the
28
other country, and does not imply an intention of retroactivity in those BITs which
do not contain the provision.
REFERENCE TO LAW OF THE SEA CONVENTION
Question. What are the legal ramifications of incorporating another treaty by ref-
erence, such as the Law of the Sea Convention, particularly when either or both of
the parties to a pending treaty are not a party to the treaty so named?
Answer. It is long-standing U.S. policy that the relevant international law govern-
ing the sovereignty, sovereign rights and jurisdiction of the states in marine areas
is as set forth in the Law of the Sea Convention.
ROMANIA
INCLUSION OF "MOVABLE AND IMMOVABLE PROPERTY"
Question. Why is "movable and immovable" property included within the coverage
of "investment" in Article I, para. l(a)(i)?
Answer. The clarifying addition of "movable and immovable" property under the
definition of "investment," Article I UXaXi), was made at the request of the Govern-
ment of Romania to ensure that coverage of "investment" under the Treaty encom-
Sassed property as defined under Romanian law. (Like other civil law jurisdictions,
omania classifies property according to its "movable" or "immovable" nature.)
LANGUAGE ON NATURAL RESOURCES IN RIGHTS CONFERRED BY LAW
Question. Why are "concessions to search for, extract, or exploit natural resources"
added to the phrase pertaining to rights conferred by law or contract in Article I,
para. l(aXv)?
Answer. The clarifying reference to "concessions to search for, extract, or exploit
natural resources" was added to Article l(aXv) at the request of the Government
of Romania to draw attention to an economic sector that the Government of Roma-
nia views as particularly attractive to U.S. investors. The U.S. Government views
such cbncessions as encompassed by the prototype language, "rights conferred by
law or contract * * * and any licenses ana permits pursuant to law."
LANGUAGE ON ASSOCIATED ACTIVITIES
Question. Can it be a detriment to have an expanded list of "associated activities"
under Article I, paragraph l(eXv)? Is that list all inclusive?
Answer. The list of "associated activities" under Article I, 1(e) is illustrative onlv,
and therefore not intended to be all-inclusive. In negotiating BITs with formerly
Communist countries whose economies are in transition, the United states has often
found it useful to expand the illustrative list of "associated activities" to make clear
to the other side the types of associated activities to which the obligations of the
Treaty would apply. Since the list is merely illustrative, the U.S. Government does
not believe that an expanded list should be viewed as detrimental.
DEFINITION OF "TERRITORY"
Question. Why is there a definition of "territory" included here (Art. I, para. 1(f)),
when such a term is not defined in the Prototype BIT?
Answer. At the request of Romania, a mutually agreed-upon definition of the term
was drafted. The definition does not change the territorial scope of the BIT.
REFERENCE TO LAW OF THE SEA CONVENTION
Question. Why does the definition of "territory" make reference to the Law of the
Sea Convention, a treaty which the United States has heretofore refused to sign?
Answer. It is longstanding U.S. policy that the relevant international law govern-
ing the sovereignty, sovereign rights and jurisdiction of States in marine areas is
as set forth in the Law of the Sea Convention.
DELETION OF EXCHANGE RATE LANGUAGE IN ARTICLE III
Question. With respect to the expropriation provisions, why has the phrase at the
end of Article III, paragraph 1, that the compensation shall be freely transferable
"at the prevailing market rate of exchange on the date of expropriation" been de-
leted in this BITf Can Romania thereby arbitrarily set a rate of exchange?
Answer. The Treaty requires that compensation for an expropriation be calculated
on the basis of the prevailing market rate of exchange "at that time," i.e., at the
earlier of the date ofexpropriation or the date that such action became known. This
29
f>rovision clarifies the intention that the exchange rate for calculating compensation
or expropriation must be determined in accordance with the effective date of expro-
priation, and is consistent with international practice.
ARTICLE VI— CONCEPT OF CONSULTATION AND NEGOTIATION
Question. What is the significance of the addition in Article VI, paragraph 2, that
the concept of consultation and negotiation "may include the use o? nonbinding
third-party procedures such as conciliation?"
Answer. The reference to "nonbinding third-party procedures such as conciliation"
generally conforms to the text of U.S. prototypes in use prior to 1992 and makes
explicit the availability of such procedures referenced in Article VI (3) of the proto-
type text. This provision is not intended to prevent access to binding arbitration at
the investor's choice.
ARBITRATION COSTS
Question. What is the intention and effect of the addition in Article VII, para-
graph 4(a) that each Party shall bear the costs of its own representation in the arbi-
tral proceedings? Might one argue that for the BITs that do not contain such a pro-
nouncement that a Tribunal might have authority to apportion the costs?
Answer. The Prototype BIT requires the Parties to share the costs of an arbitra-
tion panel equally, subject to the discretion of the panel to reallocate costs where
appropriate. In the Romania BIT, costs incurred by an arbitral panel remain gov-
erned by the procedures in the prototype BIT. The Government of Romania re-
quested the addition of a sentence clarifying that each Party bears the costs of its
own representation in the proceedings. This reflects the intended operation of the
prototype text and should not affect the interpretation of other BITs.
LOTTERIES AND GAMES OF CHANCE EXCEPTED FROM NATIONAL TREATMENT
Question. In the list of sectors for Romania excepted from national treatment are
"lotteries and games of chance." Is there some special reason why this unusual cat-
egory is included?
Answer. The Government of Romania requested this exception after demonstrat-
ing that its existing laws denied national treatment to foreign investors in this eco-
nomic sector. Such laws are typical in many nations in Eastern Europe, where in-
vestment in "lotteries and games of chance" is often reserved to the state.
DEFINITION OF "NATIONAL" IN PROTOCOL
Question. Section 1 of the protocol addresses the meaning of a "national" with re-
spect to Romania. In light of all the other changes in the main body of the treaty,
why was this clarification not made in the definition of "national" in Article I, para-
graph 1(c)?
Answer. Protocols are often used to further refine, interpret, or apply an obliga-
tion to a specific situation that may be a subset of the issue covered in the body
of the BIT, or to clarify or otherwise address issues that affect only one of the Par-
ties to an agreement. Since the provision in question constituted a clarification with
respect to Romania, the protocol, rather than the main body of the Treaty, was con-
sidered the more appropriate place to include the provision.
CLARIFICATION OF MEANING OF COVERAGE OF ARTICLE 11(9)
Question. What is the distinction between Section 2 of the Protocol and the actual
text language of Article II, paragraph 9(a)?
Answer. Section 2 of the Protocol clarifies that an arrangement that is greater in
scope than a customs union or free trade area, and designated by some other term,
falls within the coverage of Article 11(9) of the Treaty.
BULGARIA
NEED FOR PROTOCOL
Question. Why was a protocol necessary for this treaty since it is so brief and the
gist of its substance could have been incorporated into the text of the treaty?
Answer. Protocols are often used to further refine, interpret, or apply an obliga-
tion to a specific situation that may be a subset of the issue covered in the body
of the BIT, or to clarify or otherwise address issues that affect only one of the par-
ties to an agreement. Since the provision in question constituted a clarification with
respect to Bulgaria, the protocol, rather than the main body of the Treaty, was con-
sidered the more appropriate place to include the provision.
30
SIGNIFICANCE OF TERM "CONVICTION" IN PREAMBLE; COMPARISON WITH RUSSIAN BIT
Question. What is the significance of the "conviction" in the preamble concerning
a free and open market investment offering the best opportunity for raising living
standards? what is the difference in the similar concept, but with different lan-
guage, used in the preamble of the BIT with the Russian Federation?
Answer. The expression of this conviction in both cases serves to identify the con-
clusion of a BIT with the commitment of the Russian and Bulgarian governments
to increase productivity and improve living standards by implementing market re-
forms that promote integration into the world economy. The variation in wording
is not significant.
DEFINITION OF "COMPANY"
Question. Under the definitions, a "company" is further defined to include "state
enterprise" (Art. 1, para. 1(b). Why is such, an addition necessary when the defini-
tion of "company" already includes organizations governmentally owned and con-
trolled?
Answer. This addition to the illustrative list of "companies" is not substantive.
The Bulgarian side, however, requested that we add state enterprises to the illus-
trative but nonexhaustive list included in the definition on the grounds that such
a list should include the most common type of enterprise in Bulgaria.
DEFINITION OF "NONDISCRIMINATORY, NATIONAL TREATMENT AND MFN"
Question. Why was it deemed necessary in this treaty to specifically define "non-
discriminatory, national treatment," and "most-favored-nation" treatment? [Art. 1,
paras. 1(f), Ug), and 1(h)].
Answer. These definitions are not necessary to the Treaty. The Bulgarians
thought that they would simplify the treatment article and that it was preferable
to express the treatment obligations in familiar terms such as "national treatment"
and "most-favored-nation" treatment.
ABSENCE OF DEFINITION OF "TERRITORY"
Question. Why is there no definition of "territory" in this treaty since such a defi-
nition appears in the Romania BIT?
Answer. The Bulgarian BIT conforms to our prototype in this respect. A definition
of territory is not necessary.
TREATMENT OF "ASSOCIATED ACTIVITIES" IN COMPARISON WITH ROMANIA BIT
Question. What accounts for the difference in the treatment of "associated activi-
ties" in this treaty with the BIT with Romania? Why is the expanded list different
since both of these nations have a centrally-controlled, nonmarket economy?
Answer. The difference, a long list for Bulgaria as compared to two shorter lists
for Romania, is one of form only. There is no difference in substance, since the lists
for both countries are illustrative rather than exhaustive. These lists were compiled
at different times.
MODIFICATION IN PROHIBITION ON EXPROPRIATION
Question. What is the reason for, and the significance of, the change in the prohi-
bition on expropriation (Art. 3) from "through measures tantamount to expropria-
tion" to "through measures tantamount in their consequences to expropriation*?
Answer. The two express ions are equivalent. Both cover creeping expropriation.
The Bulgarians, however, thought that the longer version was clearer.
EXCEPTION TO TRANSFERS
Question. In Art. IV, para. 2, an exception to the transfer in freely usable currency
is set forth for compensation. Why was this added, and why was it dropped from
the Congo BIT when that was the prototype text?
Answer. This is not actually an exception with respect to the obligation of the par-
ties to permit transfers in freely usable currency. Instead it is a clarification that
refers the reader to a provision in the expropriation article which specifies that the
relevant exchange rate for calculating compensation payments related to an expro-
priation is the rate prevailing on the date of expropriation. We use the rate prevail-
ing on the date of expropriation because we do not want the expropriated investor
to Dear the exchange risk in the event that compensation is delayed.
This clarification appeared in earlier BIT prototypes; and it therefore appears in
the BITs that we negotiated on the basis of these prototypes, including those with
Argentina, Bulgaria, and the Congo. We dropped it on the grounds of redundancy
31
in later prototypes and in the treaties based on these later prototypes, as for exam-
ple in the Romania BIT.
COMPENSATION CALCULATIONS
Question. In Art. IV, para. 2 the concept found in the Prototype BIT of "cal-
culated" at the prevailing rate is removed. What accounts for this modification?
Answer. The wording of this paragraph in the Argentine and Bulgarian BITs is
based on an earlier BIT prototype which did not contain the phrase "be calculated
in a freely usable currency on the basis of the prevailing market rate of exchange
at that time" (the date of expropriation). We added this phrase to our current proto-
type in an ongoing effort to be more explicit about how the investor is to be made
whole in the event of an expropriation.
In our view, the absence of this phrase in our earlier BITs, including those with
Argentina and Bulgaria, does not change the substance of what must be done to
make the investor whole. These BITs specify that compensation shall lie freely
transferable at the prevailing market rate of exchange on the ate of expropriation."
To determine the amount of foreign exchange to be transferred, it is necessary to
calculate the value of the investment in a freely usable currency at the time of ex-
propriation and then to fully compensate the investor for any delay in the payment
of compensation by adding on interest at a commercially reasonable interest rate
that would be available to a holder of the freely usable currency.
FORMAT CHANGE IN ARTICLE VI
Question. What is the reason for the change in format of Art. VI?
Answer. The two different formats are from different editions of the prototype
BIT.
MODIFICATION OF DEFINITION OF INVESTMENT DISPUTE
Question. What is the reason for, and significance of, adding a proviso to the defi-
nition of an investment so that the denial of an investment authorization in itself
does not constitute an investment dispute unless the denial involves a breech of any
right in the treaty.
Answer. This proviso was added at the request of Bulgaria to clarify, for example,
that an investment authorization otherwise permitted by the Treaty would not here
be forbidden. The proviso notes that the provision in question confers rights with
respect only to authorizations which have been granted; however, the investor's
right, pursuant to Article 1(1), to challenge a denial of an investment authorization
as a breach of the treaty is explicitly not affected.
CHOICE BETWEEN CONCILIATION AND ARBITRATION
Question. What is the purpose of providing in Art. VI, para. 3 that if the parties
disagree over whether conciliation or binding arbitration is the more appropriate
procedure, the opinion of the national or company concerned shall prevail?
Answer. The purpose of this provision is to ensure that the investor always has
the ability to choose binding international arbitration to resolve an investment dis-
pute. This is one of the main BIT objectives and is part of the prototype BIT.
ARBITRATION COST ALLOCATION
Question. What is the reason for the variation in language from the BIT with Ro-
mania concerning each party bearing the cost of its "legal representation" as distin-
guished from the "cost of its own representation in the arbitral proceedings." (Art.
VH, para. 4(a)?
Answer. The variations are purely ones of form. There is no difference in sub-
stance.
ARGENTINA
CALVO DOCTRINE DEFINED
Question. Please supply a complete legal definition and explanation of the "Calvo
Doctrine" and the "Calvo Clause." Include the position of the United States on the
validity thereof.
Answer. The Calvo Doctrine, named after a nineteenth century Argentine jurist
and diplomat, states that foreigners are not entitled to rights not accorded to nation-
als, and that a government's liability can be no greater for foreigners than that
which it has for its own nationals. Thus, although the Doctrine provides for national
treatment, it excludes the possibility that disputes between a foreign investor and
a host government can be decided other than in the host country legal system.
32
A Calvo Clause is a clause, usually contractual, in which a foreigner agrees to
waive any right that the foreigner may have to the diplomatic protection of his or
her government in connection with matters arising under the contract.
The United States has consistently taken the position that the Calvo Doctrine is
invalid and that the rights and obligations of the United States with respect to the
Jirotection of the interests of its nationals in foreign countries cannot legally be af-
ected by the Calvo Doctrine or a Calvo Clause.
RECOGNITION OF CALVO DOCTRINE
Question. Is it possible to argue that by asserting a treaty provision negates a doc-
trine then there is an implied recognition of that doctrine?
Answer. No. For example, the United States has maintained a firm and consistent
position that the Calvo Doctrine is invalid. Argentina, in entering into the BIT, has
removed U.S. investors in Argentina from the obligation to submit disputes only to
local courts. Our noting this cannot be read to imply any recognition of the Calvo
Doctrine by the United States.
RIGHT TO ARBITRATION
Question. In what way is there an "absolute" right to arbitration in the treaty?
Isn't arbitration just one option under the treaty?
Answer. The BIT with Argentina provides that investors are given a choice among
international arbitration, resort to local courts, or previously agreed-upon dispute
settlement procedures, with the proviso that the choice of one precludes use of the
others. An investment dispute between a Party and a national or company of the
other Party, including a dispute involving an investment authorization or the inter-
pretation of an investment agreement, may be submitted to international arbitra-
tion six months after the dispute arose. Exhaustion of local remedies is not required
or permitted, and any such requirement is inconsistent with this BIT.
USE OF PROTOCOL
Question. Why is the format changed here by putting sector exceptions in the Pro-
tocol rather than in an Annex? If such material is properly place in a Protocol, why
is an Annex needed at all in any of the BITs?
Answer. Because the U.S. uses a Prototype text in all of our BIT negotiations, it
is our preference to use a protocol and not the main body of text to make changes.
In addition, protocols often further refine, interpret, or apply an obligation to a spe-
cific situation that may be a subset of the issue covered in the body of the BIT.
The Argentine BIT contains a lengthy protocol. The items normally placed in an
annex were combined with the items in the protocol for presentational purposes. An-
nexes and protocols are integral parts of the treaty, and as a legal matter, there
is no difference between an obligation contained in the text and one effected through
an annex or a protocol.
DEFINITION OF INVESTMENT TO INCLUDE CLAIMS DIRECTLY RELATED TO AN
INVESTMENT
Question. What is the significance in a change of language from claims "associated
with" an investment to "directly related" to an investment Article I(lXaXiii)?
Answer. The language in sub-paragraph iii of the definition of investment — Article
I(lXa)(iii>— was changed from claims "associated with" an investment to "directly re-
lated" to an investment at the request of the Argentine side to state that debt that
otherwise would not be considered as an investment has to have a direct relation
to an investment to be covered by the treaty. This language is consistent with the
intent of the provision of the prototype treaty.
DEFINITION OF COMPANY TO INCLUDE "STATE ENTERPRISE"
Question. Why is it necessary to include "state enterprise" within the definition
of "company" (Article I, paragraph 1(b))?
Answer. The definition of "company" in the Prototype BIT is broad to cover vir-
tually any type of legal entity organized under the laws and regulations of a Party,
including state enterprises.
DEFINITION OF "TERRITORY"
Question. Why has a specific definition of "territory" been included in this treaty
(Article I, paragraph 1(f))/
33
Answer. At the request of Argentina, a mutually agreed-upon definition of the
term was drafted. The definition does not change the territorial scope of the BIT.
REFERENCE TO LAW OF THE SEA CONVENTION
Question. Why does the definition of "territory" include reference to the Law of
the Sea Convention?
Why would reference be made in a pending bilateral treaty to a multilateral trea-
ty to which neither of the present parties are a party to?
Answer. The BIT is intended to cover investment activities in maritime areas
under the sovereignty or jurisdiction of each State. It is long-standing U.S. policy
that the relevant international law governing the sovereignty, sovereign rights and
jurisdiction of States in marine areas is as set forth in the Law of the Sea Conven-
tion.
TERRITORIAL SEA CLAIM
Question. By including any reference to sea law, is the United States implied rec-
ognizing Argentina's claim to a 200-mile territorial sea?
Answer. In 1991 Argentina rolled back its territorial sea claim to 12 nautical
miles.
REFERENCE TO BINDING OBLIGATIONS UNDER MULTILATERAL AGREEMENTS
Question. In the provision dealing with the nonapplicability of the most favored
nation provisions of the treaty (Article II, paragraph 9), why has there been a re-
moval of the reference to any binding obligations under any multi lateral inter-
national agreement under the framework of GATT subsequently entered into?
Answer. The negotiation with Argentina was concluded before this provision was
added to the Prototype BIT.
SIGNIFICANCE OF ARTICLE HI
Question. What is the reason for, and significance of, Article HI?
Answer. This article contains language found in paragraph 2 of Article X of the
Prototype BIT. It allows a Party to apply formalities in connection with the estab-
lishment of investment, provided that the formalities do not impair the substance
of any Treaty rights. Such formalities would include, for example, U.S. reporting re-
quirements for certain inward investment.
ARTICLE III — SIGNIFICANCE OF "ADMISSION OF INVESTMENTS"
Question. What is the meaning of "admission of investments" as used in Article
III?
Answer. "Admission of investments" is identical in meaning to the language "es-
tablishment of investments," contained in the Prototype BIT.
EXPROPRIATION COMPENSATION
Question. With respect to compensation to be paid for expropriated investments
(Art IV, para. 1), why has, and what is the meaning of, the phrase been removed
that such is to "be calculated in a freely usable currency on the basis of the prevail-
ing market rate of exchange at the time?"
Answer. The wording of this paragraph in the Argentine and Bulgarian BITs is
based on an earlier BIT prototype which did not contain the phrase "be calculated
in a freely usable currency on the basis of the prevailing market rate of exchange
at that time" (the date of expropriation). This earlier prototype served as the basis
for the BIT negotiations with Argentina and Bulgaria. We added this phrase to our
current prototype in an ongoing effort to be more explicit about how the investor
is to be made whole in the event of an expropriation.
In our view, the absence of this phrase in our earlier BITs, including those with
Argentina and Bulgaria, does not change the substance of what must be lone to
make the investor whole. These BITs specify that compensation shall "be freely
transferable at the prevailing market rate of exchange on the date of expropriation."
To determine the amount of foreign exchange to be transferred, it is necessary to
calculate the value of the investment in a freely usable currency at the time of ex-
propriation and then to fully compensate the investor for any delay in the payment
of compensation.
TRANSFERS — DIRECTLY RELATED OF AN INVESTMENT
Question. What is the legal effect of adding the phrase "directly related to an in-
vestment" in Article V, paragraph 1(d)?
34
Answer. Article V, paragraph 1(d) indicates "transfers related to an investment,"
and includes payments made under a contract. The phrase "directly related to an
investment" was added to the illustrative example of amortization of principal and
accrued interest payments made pursuant to a loan agreement" at the request of
the Argentine side. This language is consistent with the objectives of this provision
of the prototype treaty — which already contains the qualifying language, "related to
an investment," in the first line.
TRANSFERS
Question. In comparison to the comparable provision in the Prototype BIT, please
explain the meaning of Art V, para. 2.
Answer. The Argentine text has two additional provisions:
First, it contains the phrase "Except as provided in Article IV para. 1." This
phrase is from an earlier prototype that was in use when the BIT negotiations with
Argentina began. It is a redundant clarification that refers the reader to a provision
in the expropriation article which specifies that the relevant exchange rate for cal-
culating compensation payments related to an expropriation is that prevailing on
the date of expropriation. We use the rate prevailing on the date of expropriation
because we do not want the expropriated investor to bear the exchange risk in the
event that compensation is delayed.
The second additional provision is this sentence: 'The free transfer shall take
place in accordance with the procedures established by each Party; such procedures
shall not impair the rights set forth in this Treaty."
This provision makes it clear that either country has the right to prescribe certain
formal procedures in connection with a transfer, such as filling out reports for sta-
tistical purposes or application forms, but only if these procedures do not sub-
stantively impede the free transfer. We believe this right is implicit in the treaty
and does not need to be specified. The Argentine negotiators, however, wished ex-
plicit assurance on this point.
EXPENSES OF ARBITRATION
Question. Why has the authority of the Tribunal to direct on Party to pay a higher
proportion of the costs been removed here (Article VIII, paragraph 4)?
Answer. This was done at the request of Argentina, to reflect common inter-
national treaty practice.
PRESCRIBING FORMALITIES IN CONNECTION WITH AN INVESTMENT
Question. Why has the provision found in the Prototype BIT to the effect that the
treaty does not preclude either Party from prescribing special formalities in connec-
tion with the establishment of investments but that such cannot impair the sub-
stance of any of the treaty rights been removed here?
Answer. This provision is contained in Article III of the Treaty with Argentina.
CHANGE IN ANNEX FORMAT
Question. Why has the format for the United States sectoral exceptions been
changed?
Answer. Because the U.S. uses a Prototype text in all of our BIT negotiations, it
is our preference to use a protocol and not the main body of text to make changes.
In addition, protocols often further refine, interpret, or apply an obligation to a spe-
cific situation that may be a subset of the issue covered in the body of the BIT.
The Argentine BIT contains a lengthy protocol. The items normally placed in an
annex were combined with the items in the protocol for presentational purposes. An-
nexes and protocols are integral parts of the treaty, and as a legal matter, there
is no difference between an obligation contained in the text and one effected through
an annex or a protocol.
DEBT-EQUITY CONVERSIONS
Question. Please explain the role of debt-equity conversions in relation to this
Treaty.
Answer. In the Argentine-U.S. BIT, an investor has an unqualified right to trans-
fer funds related to the investment into and out of country in which the investment
is made, notwithstanding this right, an investor may agree separately that an in-
vestment made through a debt-equity swap program is subject to restrictions on
profits and dividends as well as on transfers oi capital.
The purpose of this protocol is to ensure that the transfer provision of the BIT
does not override or otherwise modify the transfer restrictions of a debt-equity pro-
gram. In a debt-equity swap, an investor agrees to restrictions on caplital and prof-
35
its in return from a better deal than can be obtained through more conventional
means. The price of an investment made through a debt-equity conversion presum-
ably reflects a mutually agreeable and beneficial arrangement which takes transfer
restrictions into account.
DEBT-EQUITY EXCEPTIONS
Question. Would the investor have any rights under the treaty or would all rights
be determined by the debt-equity conversion agreement? Who makes such a deter-
mination?
Answer. The investor retains all the rights of the treaty except for the provision
on free transfers which may be affected by the debt-equity swap agreement. More-
over, the investor would retain the right of free transfer for any prior or subsequent
investments that were made outside the context of the debt-equity swap agreement.
FUTURE DEBT EQUITY PROGRAMS UNDER OTHER BITS
Question. What would happen if a nation with which the United Sates has a BIT
decides to establish a debt-equity conversion program?
Answer. As a condition for receiving the financial benefit of a debt-equity swap,
an investor typically agrees to restrictions on transfers. The purpose of the protocol
is to make it clear that the BIT does not affect the contractual obligations regarding
transfers under the debt-equity swap agreement, and that the host country's right
to enforce such restrictions is likewise unaffected.
We believe the protocol is useful, but not essential, for countries that either have
or may establish a debt-equity swap program. Therefore, we offer it to such coun-
tries.
KAZAKHSTAN
s
AMENDMENTS TO KAZAKHSTAN BASIC LAW ON INVESTMENTS
Question. At last year's hearing on BITs, the Department of State indicated that
several amendments to the Kazakhstan Basic Law were being drafted which will
expand the privileges granted to joint ventures and international banks. They were
due to be submitted to the Supreme Soviet at a session in September 1992. Were
they passed?
Answer. Yes, these amendments were passed, as expected, by the Kazakhstani
Supreme Soviet in September 1992.
AGENCY FOR FOREIGN INVESTMENT
Question. Last year, the Department of State indicated that the Kazakhstan Gov-
ernment had established a National Agency for Foreign Investment to aide foreign
investors. Is this agency still in existence?
Answer. Yes. The Kazakhstan National Agency for Foreign Investment (NAFI),
established by a June 8, 1992 presidential decree, is now operational. It is also the
recipient of technical assistance and institution-building support from the World
Bank, which will begin programs to help investment in mining, and foreign invest-
ment and regulation, later this fall.
ARMENIA
NEED FOR EXCHANGE OF NOTES TO CONFIRM LANGUAGE CONFORMITY
Question. What is the reason for providing specifically that for the Armenian lan-
guage text to be equally authentic with the English that there be an exchange of
diplomatic notes confirming its conformity with the English text? Is this an intended
divergence from the requirement set forth in 22 CFR 181.4? Since this similar re-
quirement appears in some other recent BITs, will this be a regular feature in fu-
ture BITs?
Answer. At the time the Treaty was signed an authentic Armenian language text
had not been certified to conform with the English language text. Therefore, only
the English language text was signed. The exchange ofdiplomatic notes acknowl-
edges the completion of the steps to conform the Armenian text that was prepared
with the English.
The procedure was not inconsistent with 22 CFR 181.4 in that no foreign lan-
guage text was signed or concluded at the time the English language text was
signed. Rather, the Treaty provides specifically for the subsequent preparation of an
Armenian text to conform with the English language.
This procedure was followed in this case, and with several other of the newly
independent states of the former Soviet Union, because of the dearth of U.S. experts
36
in these languages, and the extraordinary length of time needed to perfect treaty
texts in these languages. It does not indicate a change in routine U.S. practice.
MOLDOVA
DEFINITION AND LEGAL SIGNIFICANCE OF SIDE LETTER
Question. What is the definition of and legal significance of a "side letter?"
Answer. Side letters may be used, inter alia, to refine, interpret, or expand on is-
sues related to the subject of a treaty, including issues that may affect only one of
the Parties to an agreement, as is the case with the side letter in the Moldova BIT.
The legal significance of the side letter to the Moldova BIT is specifically set forth
in Article XII(4) of the Treaty, which states that the side letter forms an integral
part of the Treaty- and the in terms of the side letter itself, which provide that the
side letter be treated as an integral part of the Treaty.
DELETION OF EXCLUSIONS FROM DISPUTE SETTLEMENTS
Question. Why has the Article dealing with exclusion from dispute settlements
been removed from this treaty?
Answer. Article VIII had served to exclude from the dispute settlement provisions
of the BIT disputes arising under the export credit, guarantee or insurance pro-
grams of the Export-Import Bank of the United States, as well as those of any other
such official program pursuant to which the Parties have agreed to other means of
settling disputes. The Export-Import Bank, the Overseas Private Investment Cor-
poration, and other relevant government agencies indicated prior to this negotiation
that this provision is no longer necessary.
KYRGYZSTAN
REASON FOR LACK OF PROTOCOL
Question. If no Protocol was necessary for this BIT, why would such an addition
be needed in any of the others?
Answer. Protocols are often used to further refine, interpret, or apply an obliga-
tion to a specific situation that may be a subset of the issue covered in the body
of the BIT, or to clarify or otherwise address issues that affect only one of the Par-
ties to an agreement. Since no such situations arose in our negotiations with
Kyrgyzstan, a protocol was not necessary.
REASON FOR LACK OF EXCEPTIONS TO NATIONAL TREATMENT
Question. Is there any special reason why Kyrgyzstan has not reserved the right
to make section exceptions from national treatment?
Answer. The Kyrgyz delegation explained that there were no restrictions on for-
eign investment under their laws, so no exceptions to national treatment were nec-
essary. The Kyrgyz government sees this as an advantage that it wants to publicize
in its efforts to attract foreign investment. Paragraph 3 was added to the Annex to
the Treaty to make this clear.
TRANSITION FROM CENTRALLY CONTROLLED MARKET
PROVISIONS TO ASSIST U.S. INVESTORS
Question. The treaties with Armenia, Kazakhstan, Kyrgyzstan, Moldova, and Ro-
mania have provisions to assist U.S. investors with the transition from a centrally-
controlled, non-market economy.
Please describe how those provisions in each of the treaties will assist U.S. inves-
tors.
I understand some of these countries have set up special offices to assist U.S. in-
vestors with investment information and bureaucratic red tape, which countries
have take these initiatives, how is each office structured to assist U.S. investors,
and what practical assistance have they provided U.S. investors to date?
Answer. All these agreements include, in the last paragraph of Article II, a provi-
sion giving a more illustrative list of activities associated with an investment.
(These activities are protected by all our BITs.) These provisions assisted U.S. nego-
tiators in describing and clarifying, for those treaty partners making a transition
to a market economy ,the breadth of activities to which the obligations of national
and MFN treatment apply.
37
Romania and Moldova will be obliged, by the terms of their treaties, to designate
a development office to assist U.S. investors. We expect these offices to be of assist-
ance to U.S. investors.
ECUADOR
COMPARED TO BIT WITH ARGENTINA
Question. What accounts for the differences between this BIT and the one with
Argentina? Can it be expected that future BITs with other Latin American nations
will not follow any predictable pattern?
Answer. The differences in the BITs reflect the different circumstances of each
country, as well as the fact that the Argentine BIT is based on an earlier version
of the prototype BIT than our BIT with Ecuador. However, the obligations contained
in the two treaties are essentially the same. Each BIT'S variations from the proto-
type are discussed in the letter from the Secretary of State to the President describ-
ing that treaty.
LEGAL STATUS OF TREATIES IN ECUADOR
Question. What is the legal status of treaties in Ecuador? why is it necessary to
have pronouncements in the side letter that the treaty satisfies specific administra-
tive or other authorizations found in the laws of Ecuador?
Answer. In accordance with international law, upon entry into force Ecuador must
comply in good faith with the obligations of the Treaty. Thus, Ecuador has to take
those steps necessary under its domestic law in order to be able to fulfill its inter-
national obligations.
The side letter was made an integral part of the Treaty at the request of Ecuador
in order to simplify and hasten the granting of administrative and other authoriza-
tions under Ecuadorian law to U.S. investors. By explicitly confirming that the trea-
ty constitutes the necessary approval under these laws, the Ecuadorian government
sought to reduce or eliminate certain bureaucratic practices identified as impedi-
ments to investment there. The U.S. government believes that these provisions will
make it easier for U.S. investors to operate in Ecuador.
ECUADOR DEBT-EQUITY CONVERSION PROGRAM
REASON FOR AND DESCRIPTION OF PROGRAM
Question. The Protocol to the treaty with Ecuador notes that Ecuador may estab-
lish a program to allow U.S. nationals to invest in the Republic of Ecuador through
purchase of debt at a discount.
Why was this aspect of the treaty agreed to?
Has such a program been established and have U.S. investors expressed any in-
terest?
Answer. This provision in the Protocol was added at the suggestion of the United
States. The United States has been generally supportive of debt-equity conversion
programs as part of the overall solution to the debt problem and has considered
them to be an important element in commercial bank financing programs to reduce
debt and debt service payments. Ecuador has not established such a program. How-
ever, this provision ensures that the BIT will not impede the government of Ecuador
from establishing a debt-equity conversion program in the future.
O
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