CIEL sends letter to USTR's Ambassador Zoellick regarding potential inclusion of the grant of jurisdiction in the Free Trade Area of the Americas

June 25, 2003

Ambassador Robert B. Zoellick
United States Trade Representative
600 17th Street, N.W.
Washington, DC 20508

Dear Ambassador Zoellick,

I write regarding the grant of jurisdiction regarding investment agreements and authorizations contained in the U.S.-Chile and U.S.-Singapore Free Trade Agreements (FTAs). I understand from a letter that the American Bankers Association and other industry executives sent to you that USTR is considering whether or not to include the grant of jurisdiction in the Free Trade Area of the Americas (FTAA). For the reasons outlined below, I oppose its inclusion in the FTAA. In addition, I understand that your staff has briefed industry representatives on the internal U.S. deliberations, and I would like to request a similar briefing for NGOs from the health and environmental community at your office's earliest convenience.

The investment chapters of the U.S.-Chile and U.S.-Singapore FTAs allow private investors to bring an arbitral claim against the United States for claims based on a breach of "an investment authorization" or "an investment agreement". Several U.S. bilateral investment treaties (BITs) also include this jurisdictional grant.

The magnitude and implications of these jurisdictional grants have not been adequately assessed, but it is immediately evident that they will have significant negative effects. This language undermines domestic legal systems by removing an important class of disputes from them, opens whole new areas of potential investor challenges to domestic regulatory programs, and provides foreign investors better treatment than U.S. domestic businesses have. The investment agreements covered by them are not commercial disputes, but involve important policy questions regarding public assets, including natural resources such as oil, gas, timber, water, etc. Moreover, the language "assets that a national authority controls" included in the FTAs is broad enough to encompass, inter alia, disputes over government procurement, services, and a number of regulations and permits.

In particular, I are concerned about the role of the U.S. judiciary and the administration in upholding the rule of law. Whether a party is in breach of investment agreements or authorizations should be determined under applicable U.S. law, and through the statutorily mandated process of administrative courts followed by appeal, if necessary, to U.S. federal courts. That comprehensive body of law defines the competence, rights and obligations of the U.S. government regarding its contracts, including those concerning natural resources. Similarly, that procedural system ensures fairness and consistency in dealing with the multitude of issues involved in U.S. government contracting. It is also critically important that legitimate U.S. regulatory decisions (e.g., regarding health, environmental, communications, energy, and nuclear issues) be tested in the U.S. court system and be subject to U.S. laws, not subject to second-guessing by ad hoc arbitrators.

If it is problematic for foreign investors to take disputes over U.S. contracts and administrative and regulatory measures out of the established domestic processes designed to review them, then it is equally problematic for U.S. investors abroad to bypass the national judicial system of the host country to challenge that country's administrative and regulatory systems, absent a showing of futility. Respect for the rule of law requires that domestic legal processes be given the opportunity and responsibility to work.

The inclusion of a separate jurisdictional grant is also unnecessary, because rights conferred by these investment authorizations and agreements are already protected, to the extent that they are included in the definition of investment in FTAs or BITs by substantive expropriation disciplines. What the new jurisdictional grants do is to make any dispute and all issues arising out of these agreements actionable for damages before unaccountable, ad-hoc arbitral tribunals.

This expansion of the investor-state arbitration is problematic, no less because these disputes can involve the collection of royalties over natural resource extraction, as well as out of measures adopted by U.S. agencies to exact compliance with their regulations. Also, as the NAFTA cases to date demonstrate, the investor-state mechanism suffers from severe democracy deficits, as it allows foreign investors to by-pass the judiciary, thereby compromising the rule of law and foregoing opportunities for procedural and substantive justice.

Best regards. If you have any questions regarding this letter, please do not hesitate to contact me at 202-785-8700.

Sincerely,

Daniel Magraw
Executive Director,
Center for International Environmental Law