September 19, 2002
Ambassador Robert B. Zoellick
United States Trade Representative
600 17th St., NW
Washington, DC 20508
Dear Ambassador Zoellick:
We write regarding the General Treatment provision in the context of negotiations of the upcoming United States-Chile and other free trade agreements and bilateral investment agreements. As you well know, the environmental community has serious concerns with other aspects of U.S. investment policy (e.g., expropriation, definitions, national treatment, performance requirements, and the investor-state dispute settlement process). The focus of this letter on General Treatment must in no way be read to imply any lessening of those concerns. We are focusing on General Treatment, because we understand a decision on the final U.S. negotiating position is about to be made and submitted to the Chilean negotiators.
At the outset, let us emphasize that, despite the admonition in the Bipartisan Trade Promotion Authority Act of 2002 to “ensur[e] that foreign investors in the United States are not accorded greater substantive rights with respect to investment protections than United States investors in the United States,” the Administration does not appear to be engaging in the type of thoughtful process required to achieve that result. Rather, it appears to be in a rush to table new language at the upcoming United States-Chile negotiations. In addition, we note that the Administration has made very little effort to be transparent or to seek input, at least vis-à-vis the environmental community. This seriously disadvantages our ability to participate constructively in the development of language that meets the Congressional mandate and is in the public’s interest.
General Treatment
We believe that, if there is to be a General Treatment (also referred to as Minimum Standard of Treatment) discipline in a free trade agreement or a bilateral investment treaty, this provision should be limited by its terms to full protection and security and denial of procedural justice.
- By “full protection and security”, we mean only the direct governmental interferences with property that would be covered under U.S. law. There should be limits on the extent to which it covers physical security from conduct by third parties, for example, because we are not aware that the federal government would be liable for this in many circumstances under U.S. law (even disregarding the question of federal liability for acts or omissions of a state, local or tribal government). This is an example of the type of question that needs to be more thoroughly and publicly examined. Whatever limits exist should be clearly delineated in the text of the agreement.
- It is important to focus on denial of procedural justice, because including substantive justice would empower arbitral panels to second-guess the entire panoply of federal, state, local and tribal government actions based on each panels’ own view of substantive justice – something that has no counterpart under U.S. law. This type of second-guessing has been thoroughly discredited under U.S. jurisprudence since the Great Depression and the “Lochner era”. Even regarding a denial of procedural justice, there might need to be limits. Again, these should be clearly delineated in the agreement.
No “Fair and Equitable” Language
The General Treatment provision should not allow an arbitral panel to overturn any decision of a government based on the panel’s opinion that the decision was not “fair and equitable”. Thus, the provision should not contain the term “fair and equitable”. If a reference to this term is necessary (which we sincerely doubt), there should be clarifying text in the agreement to the effect that the term is merely a reference to, or shorthand for, general treatment and provides no substantive content on its own.
- First, there is no corresponding right under U.S. law. The closest thing to “fair and equitable” in U.S. law is the Administrative Procedure Act (APA), which allows a court to review federal regulations to determine whether they are “arbitrary or capricious”. But the APA does not apply to many governmental actions (e.g., legislation court decisions, actions by state, local and tribal governments, and exercises of prosecutorial discretion) that are covered under investment
agreements. Moreover, the APA does not provide for monetary damages (as free trade agreements allow); only injunctive relief is allowed. Foreign investors have the same rights as U.S. investors under the APA to seek injunctive relief. Enshrining this equal access in a trade agreement is one thing, but granting foreign investors the right to be paid the costs of complying with a requirement that may violate the APA but does not constitute a compensable taking under the Constitution as interpreted by the Supreme Court would clearly violate the Congress’ “no greater substantive rights” mandate. Finally, U.S. courts are bound by deference doctrines in applying the APA; there are no equivalent doctrines in treaties or other international law, to our knowledge. - Second, the “fair and equitable” language, if viewed as an independent standard, is extremely dangerous to good governance. It would allow-indeed, it invites-an arbitral tribunal to apply its own view of what is “fair” or “equitable” unbounded by any textual or other real limits. Those terms have no definable meaning, and they are inherently subjective. (If you doubt this, we suggest asking the Office of the Legal Adviser at the Department of State for a precise definition.) Indeed, we wonder how they can have any principled meaning when applied to countries with such different histories, cultures, and value systems as are involved in free trade agreements. The kind of second-guessing of governmental action-e.g., legislation, prosecutorial discretion, police action, court decisions, regulatory actions, zoning decisions, etc., at all levels of government-invited by this type of standard is antithetical to democracy and is indefensible.
No “Reasonableness” Standard
A related point is that any General Treatment provision should not include, explicitly or implicitly, a reasonableness standard. Such a standard, which we understand has been suggested by industry, is inappropriate and unacceptable for the same reasons as stated above. There is no equivalent standard in U.S. law, and this standard would open all governmental action in the U.S. to second-guessing by arbitral tribunals filled with trade or investment experts. The major difference from a “fair and equitable” standard is that under a reasonableness standard, these tribunals would be free to do their own cost-benefit analysis (among other things) and reject good faith government actions on that ground. Again, this has no place in a democratic society.
Environmental Exception
Any General Treatment provision (along with other disciplines, depending on how they are worded) should be subject to an environmental exception modeled on Article XX of the General Agreement on Tariffs and Trade (GATT), as clarified in Article 2101 of the North American Free Trade Agreement to expressly include environmental measures. The environmental exception has proven to be essential to the proper functioning of the GATT. We know of no reason why it is not also necessary here.
Exhaustion of Remedies
Finally, claimants should be required to exhaust their administrative and judicial remedies, before bringing a General Treatment claim, unless doing so would be futile. This is a long-standing requirement in the customary international law of state responsibility for injuries to aliens. There is no justification for eliminating it here, nor would it impose undue burdens on investors. Moreover, without it, foreign investors could remove themselves from the administrative or legal process whenever they want to, for entirely strategic reasons. Besides creating more disputes than would otherwise occur, this would undercut the legitimacy of governmental institutions and undermine the domestic rule of law. That is something we should avoid at all cost, both in our own country and in others, as the United States repeatedly argued at the recent World Summit on Sustainable Development.
Thank you for considering our suggestions. Should you have any questions, please contact Marcos Orellana.
Yours,
Carroll Muffett
Defenders of Wildlife
Steve Porter
Center for International Environmental Law