[Senate Executive Report 109-17]
[From the U.S. Government Publishing Office]
109th Congress Exec. Rept.
SENATE
2d Session 109-17
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TREATY BETWEEN THE UNITED STATES OF AMERICA AND THE ORIENTAL REPUBLIC
OF URUGUAY CONCERNING THE ENCOURAGEMENT AND RECIPROCAL PROTECTION OF
INVESTMENT (TREATY DOC. 109-9)
_______
August 30, 2006.--Ordered to be printed
Filed under authority of the order of the Senate of August 3, 2006.
_______
Mr. Lugar, from the Committee on Foreign Relations,
submitted the following
R E P O R T
[To accompany Treaty Doc. 109-9]
The Committee on Foreign Relations (``committee''), to
which was referred the Treaty Between the United States of
America and the Oriental Republic of Urguay Concerning the
Encouragement and Reciprocal Protection of Investment, with
Annexes and Protocol, signed at Mar del Plata on November 4,
2005 (``Proposed BIT'') (Treaty Doc. 109-9), having considered
the same, reports favorably thereon and recommends that the
Senate give its advice and consent to ratification thereof, as
set forth in this report and the accompanying resolution of
advice and consent to ratification.
CONTENTS
Page
I. Purpose..........................................................1
II. Background.......................................................2
III. Summary of Key Provisions........................................2
IV. Committee Action.................................................9
V. Committee Recommendation and Comments............................6
VI. Resolution of Advice and Consent to Ratification.................9
VII. Appendix: Hearing--U.S.-Uruguay Bilateral Investment Treaty.....11
I. Purpose
The basic purposes of the bilateral investment treaty
(``BIT'') program are to: protect investment abroad in
countries where investors' rights are not already protected
through existing agreements, such as free trade agreements;
encourage the adoption of market oriented domestic policies
which treat foreign investment in an open, transparent, and
non-discriminatory manner; and support the development of
international law standards consistent with these objectives.
There are six primary benefits which flow to parties whose
investments are covered by BITs. First, a BIT provides that
investors and their ``covered investments'' are entitled to be
treated as favorably as the host country treats its own or
third country investments. Second, it provides a defined limit
on the expropriation of investments and for prompt payment of
adequate and effective compensation if and when expropriation
may take place. Third, it provides for transferability of funds
into and out of the host country without undue delay under a
market rate of exchange and encompasses all transfers related
to a covered investment, creating a predictable environment.
Fourth, it limits circumstances in which performance
requirements can be imposed. Fifth, it gives investors from
each country the right to submit an investment dispute with the
treaty partner's government to international arbitration,
rather than domestic courts. Finally, a BIT gives investors the
ability to utilize management personnel of their choice,
regardless of nationality.\1\
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\1\ U.S. Bilateral Investment Treaty Program, Fact Sheet, Bureau of
Economic and Business Affairs, November 7, 2005; www.state.gov/e/eb/
rls/fs/22422.htm
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II. Background
The United States and Uruguay announced their intent to
negotiate a BIT on November 21, 2003, at the conclusion of the
ministerial meeting of the Free Trade Agreement of the Americas
in Miami, Florida. According to the negotiating parties, the
decision to pursue BIT negotiations emerged from work conducted
by the United States-Uruguay Joint Commission on Trade and
Investment, which was created in 2002 to enhance trade and
investment relations between the two countries. Negotiations
began in the spring of 2004 and were concluded on September 7
of that year. The treaty was signed on November 4, 2005 and was
approved by the Uruguayan legislature in December 2005. It was
submitted to the United States Senate for advice and consent to
ratification on April 4, 2006.
The Proposed BIT is the 40th such treaty concluded by the
United States, but the first negotiated since 1999. It is the
first BIT negotiated on the basis of a new U.S. model BIT text,
which was completed in 2004. The new model BIT is intended to
encompass certain objectives from the Bipartisan Trade
Promotion Authority Act of 2002.\2\ The model also contains
similar provisions to the investment chapters of recently
negotiated free trade agreements. U.S. business interests have
indicated their support for the Proposed BIT.\3\
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\2\ See, e.g., Sec. 2102(b)(3) of P.L. 107-210 (19 U.S.C.
Sec. 3802(b)(3)).
\3\ Through communications with the committee, business groups such
as the Emergency Committee for American Trade and The National Foreign
Trade Council have recently indicated their support for approval of the
proposed treaty.
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III. Summary of Key Provisions
A detailed article-by-article discussion of the Proposed
BIT is attached to the Letter of Transmittal from the Secretary
of State to the President, which is reprinted in full in Treaty
Document 109-9. A summary of the key provisions of the Proposed
BIT is set forth below.
ARTICLE 1
Definitions. The Proposed BIT defines the term
``investment'' broadly: the term means ``every asset that an
investor owns or controls, directly or indirectly, that has the
characteristics of an investment, including such
characteristics as the commitment of capital or other
resources, the expectation of gain or profit, or the assumption
of risk.'' The definition contains a non-exclusive list of the
forms that an investment may take, beginning with an
``enterprise,'' and including, inter alia, equity, bonds,
futures, turnkey operations, intellectual property rights,
licenses and authorizations conferred under domestic law, and
other tangible or intangible, movable or immovable property and
related property rights, such as leases and the like. An
``enterprise'' includes non-profit as well as commercial
entities and both private and governmentally owned or
controlled firms. An ``investor of a Party'' is ``a Party or
state enterprise thereof, or a national or an enterprise of a
Party, that attempts to make, is making or has made an
investment in the territory of the other Party; provided,
however, that a natural person who is a dual citizen shall be
deemed to be exclusively a citizen of the State of his or her
dominant and effective citizenship.'' A ``covered investment''
means, with respect to a Party ``an investment in its territory
of an investor of the other Party in existence as of the date
of entry into force of this Treaty or established, acquired, or
expanded thereafter.''
ARTICLE 2
Scope and Coverage. The Proposed BIT applies to ``measures
adopted or maintained by a Party relating to: (a) investors of
the other Party; (b) covered investments; and (c) with respect
to Articles 8, 12, and 13 (regarding transparency of investment
laws and regulations, environment, and labor) all investment in
the territory of the Party.'' The obligations in Articles 1-22
apply to state enterprises or other persons exercising any
governmental authority delegated to it by the Party as well as
to the political subdivisions of the Party.
ARTICLE 3
National Treatment. This article requires each Party to
accord national treatment to investors of the other Party and
to covered investments with respect to the entire life cycle of
an investment. National treatment is deemed to be ``treatment
no less favorable than that it accords, in like circumstances''
to its own investors or to investments in its territory of its
own investors, as the case may be. With regard to regional
governments, it is defined as ``treatment no less favorable
than the treatment accorded, in like circumstances'' by the
regional government ``to natural persons resident in and
enterprises constituted under the laws of other regional levels
of government and to their respective investments.''
ARTICLE 4
Most Favored Nation Treatment. Under this article, Parties
are required to grant to investors of the other Party and to
covered investments the treatment no less favorable than that
accorded ``in like circumstances'' to non-Party investors and
to investments in its territory by non-Party investors,
respectively, with respect to the activities listed in Article
3.
ARTICLE 5 AND ANNEX A
Minimum Standard of Treatment. This article establishes a
minimum standard of treatment that each Party owes to covered
investments. The minimum standard of treatment is defined as
``treatment in accordance with customary international law,
including fair and equitable treatment and full protection and
security.'' It also states that a breach of another provision
of the Proposed BIT or of a separate international agreement
would not necessarily constitute a breach of this article.
Annex A
Annex A contains the understanding of the Parties that
``customary international law,'' as referenced generally in the
Proposed BIT, and as specifically mentioned in Article 5
``results from a general and consistent practice of States that
they follow from a sense of legal obligation.'' For purposes of
Article 5, the ``customary international law minimum standard
of treatment of aliens refers to all customary international
law principles that protect the economic rights and interests
of aliens.''
ARTICLE 6 AND ANNEX B
Expropriation and Compensation. This article states that
neither Party may expropriate or nationalize a covered
investment, directly or indirectly, unless for a public
purpose, in a non-discriminatory manner, with compensation, and
in accord with due process and the treaty's minimum standard of
treatment requirements. Compensation must be timely and
equivalent to the value of the expropriated investment
immediately before the expropriation.
Annex B
Annex B states the understanding of the parties that
Article 6 reflects customary international law, and that
expropriation results only when the state's interference is
with a property right in an investment. Annex B further
explains that Article 6 addresses two types of expropriation:
direct expropriation, involving formal transfer of title or
outright seizure, and indirect expropriation, involving a case-
by-case inquiry that considers the economic impact of the
government action, its interference with investment-backed
expectations, and its character. Under paragraph 4(b) of Annex
B, the Parties confirm their shared understanding that, except
in rare circumstances, nondiscriminatory regulation ``to
protect legitimate public welfare objectives, such as public
health, safety, and the environment,'' do not constitute
indirect expropriation.
ARTICLE 7
Transfers. This article requires each Party to permit all
transfers relating to a covered investment to be made freely
and without delay into and out of its territory, thus ensuring
that an investor may repatriate funds associated with
investment activities. Such transfers are expressly deemed to
include contributions to capital; profits, dividends, capital
gains, and proceeds from the sale or liquidation (or any
partial sale or liquidation) of the investment; interest,
royalty payments, and various fees; contract payments;
compensation from expropriations; restitution for losses
resulting from war or armed conflict or civil strife; and
payments arising out of a dispute. Transfers must be allowed to
be made in a freely usable currency at the market rate of
exchange prevailing on the date of transfer.
ARTICLE 8
Performance Requirements. This article prohibits the
Parties from imposing requirements on the establishment,
acquisition, expansion, management, conduct, operation, or sale
or other disposition of an investment of an investor of a Party
or of a non-Party in its territory that may impair the
profitability and competitiveness of an investment. In
addition, neither Party may condition the receipt, or continued
receipt, of an advantage during the life-cycle of an investment
of a Party or of a non-Party on compliance with certain
specified requirements in this article. A Party may, however,
condition the receipt or continued receipt of an advantage on
compliance with a requirement to locate production, supply a
service, train or employ workers, construct or expand
particular facilities, or carry out research or development in
its territory. The prohibition on technology transfer
requirements does not apply with regard to certain measures
consistent with the WTO Agreement on Trade-Related Intellectual
Property Rights or when the requirement is designed to remedy a
practice determined after judicial or administrative process to
be anti-competitive under the Party's competition laws.
ARTICLE 9
Senior Management and Boards of Directors. This article
states that a Party may not place a nationality requirement on
the individuals appointed to senior management of an enterprise
of the Party that is a covered investment, but may require that
a majority of the board of directors, or a committee of the
board, be of a particular nationality, or resident in its
territory, provided that the requirement does not ``materially
impair'' the investor's ability to exercise control over its
investment.
ARTICLE 12
Investment and Environment. In this article the Parties
recognize that it is ``inappropriate to encourage investment by
weakening or reducing the protections afforded domestic
environmental laws'' and are required to ``strive to ensure''
that they do not waive or offer to waive such laws in a way
that ``weakens or reduces the protections afforded in those law
as an encouragement for'' an investment in its territory. If
one Party considers that the other has offered such an
encouragement, it may request consultations and the Parties are
to consult with the aim of ``avoiding any such encouragement.''
Nothing in the Proposed BIT may prevent a Party from taking any
measure otherwise consistent with the Proposed BIT ``that it
considers appropriate to ensure that investment activity in its
territory is undertaken in a manner sensitive to environmental
concerns.''
ARTICLE 13
Investment and Labor. In this article the Parties recognize
that it is ``inappropriate to encourage investment by weakening
or reducing the protections afforded in domestic labor laws''
and are required to ``strive to ensure'' that they do not waive
or offer to waive such laws in order to encourage investment
``in a manner that weakens or reduces adherence to the
internationally recognized labor rights'' listed in the
article. It also provides that nothing in the Proposed BIT may
be construed to prevent a Party from taking any measure
otherwise consistent with the Proposed BIT ``that it considers
appropriate to ensure that investment activity in its territory
is undertaken in a manner sensitive to labor concerns.''
ARTICLE 14, AND ANNEXES I, II, III
Non-Conforming Measures. This article provides that
Articles 3, 4, 8, and 9 (regarding, respectively, national
treatment, MFN treatment, performance requirements, engagement
of senior management) do not apply to non-conforming central
and regional government measures listed in a Party's Schedule
to Annexes I or III, or to a local level of government. In
addition, these articles will not apply to any measure that a
Party adopts or maintains with respect to sectors, sub-sectors,
or activities listed in its Schedule to Annex II.
ARTICLE 17
Denial of Benefits. This article allows a Party to deny
benefits to enterprises and investments if persons of a non-
Party own or control the enterprise and the denying Party (1)
does not maintain diplomatic relations with the non-Party or
(2) adopts or maintains measures with regard to the non-Party
that prohibit transactions with the enterprise or that would be
circumvented if the treaty benefits were accorded to the
enterprise.
ARTICLE 18
Essential Security. This article contains an exception for
measures related to a Party's essential security interests.
ARTICLE 20
Financial Services. This article provides extensive
provisions regarding financial services and special procedures
for disputes in the area. A Party is not prevented from
``adopting or maintaining measures relating to financial
services for prudential reasons . . . or to ensure the
integrity or stability of the financial system.'' The term
``prudential reasons'' is understood to include ``the
maintenance of the safety, soundness, integrity, or financial
responsibility of individual financial institutions.'' This
article also sets forth special procedures for State-to-State
disputes involving financial services.
ARTICLE 21
Taxation. This article specifies that the Proposed BIT does
not apply to ``taxation measures'' except as provided in
Article 21. It does not affect the rights and obligations of a
Party under any tax convention, and to the extent that there is
an inconsistency between a tax convention and the Proposed BIT,
the tax convention prevails. Departing from the 2004 Model, it
provides that national treatment and MFN obligations apply to
all taxation measures other than tax measures relating to
direct taxes (i.e., income and capital gains taxes, estate and
gift taxes, and the like). In addition, the expropriation
article applies to all taxation measures, except that if an
investor-state claimant asserts that an expropriation is
involved, the claimant may only submit the claim to arbitration
if the claimant had first referred the issue in writing to the
competent tax authorities of both Parties and the Parties
failed to agree, within 180 days after the date of the
claimant's referral, that the measure was not an expropriation.
ARTICLES 23-34
Investor-State Dispute Settlement. Article 24 provides that
if a disputing party considers that a dispute cannot be
resolved through consultations and negotiations, the claimant
may initiate arbitration. An investor may file a claim at least
six months after the ``events giving rise to the claim'' and
may do so under the ICSID Convention, the ICSID Additional
Facility Rules, the UNCITRAL Arbitration Rules, or if the
disputing parties agree, to any other arbitral mechanism. The
arbitration rules invoked by the claimant will govern the
arbitration except as modified by the Proposed BIT.
Article 26 provides that claims cannot be submitted if more
than three years have elapsed from the date on which the
claimant acquired (or should have acquired) knowledge of the
alleged breach and knowledge that loss or damage was incurred.
The claimant must consent in writing to arbitration according
to conditions set out in the Proposed BIT and the claim must be
accompanied by a waiver of the right to initiate or continue
before any administrative tribunal or court under the law of
either Party, or under other dispute settlement procedures, any
proceeding with respect to any measures alleged to constitute
the breach.
Article 27 addresses the selection of arbitrators.
Tribunals are normally to be composed of three arbitrators, one
appointed by each of the Parties and the third and presiding
arbitrator, appointed by agreement of the Parties. Except as
provided for financial services disputes, if a tribunal is not
constituted within 75 days of the date the claim is submitted,
the Chairman of the ICSID Administrative Council, on request of
a disputing Party, is to appoint the remaining panelists.
Article 28 governs the conduct of the arbitration,
including the venue, the ability of the non-disputing party to
make oral and written submissions to the tribunal, and the
possibility of amicus briefs from a non-disputing person or
entity. It also provides that the tribunal may award an interim
award of protection to preserve a disputing party's rights.
Article 29 provides for transparency in arbitral
proceedings, requiring that documents be made public and that
the tribunal conduct hearings open to the public, and Article
30 addresses the law that the arbitrators are to apply in the
proceedings.
Article 34 specifies that a tribunal may award only
monetary damages and any applicable interest, and restitution
of property, in which case the award is to provide that the
respondent may pay monetary damages and any applicable interest
in lieu of restitution. The tribunal may also award costs and
attorney's fees in accordance with the Proposed BIT and the
applicable arbitration rules; a tribunal may not award punitive
damages. The award has no binding force except between the
disputing parties and with regard to the particular case. Each
Party must provide for the enforcement of an award within its
territory and, where a Party fails to abide by or comply with
an award, the non-disputing Party may seek State-to-State
dispute settlement under Article 37.
ARTICLE 37
State-to-State Dispute Settlement. This article sets forth
dispute settlement procedures between states. Except for
disputes arising under Articles 12 and 13 (environment and
labor), any dispute between the Parties concerning the
interpretation or application of the Proposed BIT that is not
resolved through consultations or other diplomatic means is to
be submitted, at the request of a Party, to binding arbitration
by a tribunal in accordance with international law. Where there
is no agreement by the Parties, the UNCITRAL Arbitration rules
are to apply, except as modified by the Parties or the Proposed
BIT. Generally, tribunals are to consist of three arbitrators,
one appointed by each Party and the presiding arbitrator
appointed by agreement of the Parties. If a panel is not
constituted within 75 days after a claim is submitted, the
Chairman of the ICSID Administrative Council, on request of a
disputing Party, is to appoint the remaining arbitrators.
ANNEX C
Submission of a Claim to Arbitration. Annex C departs from
the 2004 Model in placing a special limitation on U.S.
investors seeking local remedies in the territory of the other
Party. Specifically, a U.S. investor may not submit to
investor-State arbitration a claim that Uruguay has breached an
obligation under Articles 3-10 if the investor has alleged that
breach of the obligation in proceedings before a court or
administrative tribunal of Uruguay. The limitation reflects the
fact that treaty claims may be brought in Uruguayan local
courts.
ANNEX F
Financial Services. Annex F, a departure from the 2004
Model BIT, expands on the obligations that the Parties
undertake under Article 3 (national treatment) and Article 4
(MFN treatment) regarding a ``financial institution of the
other Party'' (defined for the purposes of paragraphs 1 and 2
as ``a financial institution, including a branch, located in
the territory of a Party that is controlled by persons of the
other Party''). It further provides in paragraph 4 that no
claim that a measure relating to an investor of a Party, or a
covered investment, in a ``financial institution'' (defined for
the purposes of paragraph 4) located in the other Party
breaches Article 3 or 4 may be submitted to investor-State
arbitration.
ANNEX G
Sovereign Debt Restructuring. Annex G, which addresses
investor-State claims involving sovereign debt restructuring by
Uruguay, is another departure from the Model BIT. The Annex
states that no claims that the ``restructuring of a debt
instrument issued by Uruguay'' breaches an obligation in
Articles 5 though 10 may be submitted for investor-State
arbitration if the restructuring is a ``negotiated
restructuring,'' as defined in the Annex, at the time the claim
is submitted or becomes one after submission of the claim. A
U.S. investor may not submit a claim for investor-State
arbitration that a ``restructuring of debt issued by Uruguay''
breaches an obligation under Articles 5 through 10 unless 270
days have elapsed from the date of the events giving rise to
the claim.
IV. Committee Action
The committee held a public hearing on the Proposed BIT on
June 12, 2006. The hearing was chaired by Senator Lugar.\4\ The
committee considered the proposed treaty on August 1, 2006, and
ordered the proposed treaty favorably reported by voice vote,
with a quorum present and without objection, with the
recommendation that the Senate give advice and consent to its
ratification, as set forth in this report and the accompanying
resolution of advice and consent to ratification.
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\4\ A transcript of the June 12, 2006 hearing is included as an
appendix to this report.
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V. Committee Recommendation and Comments
On balance, the committee believes that the Proposed BIT is
in the interest of the United States and urges that the Senate
act promptly to give advice and consent to ratification. The
committee urges the executive branch to continue to work with
interested parties, including those in the U.S. business
community, to ensure the highest standards of protection for
U.S. investors overseas.
VI. Resolution of Advice and Consent to Ratification
Resolved (two-thirds of the Senators present concurring
therein), That the Senate advise and consent to the
ratification of the Treaty between the United States of America
and the Oriental Republic of Uruguay Concerning the
Encouragement and Reciprocal Protection of Investment, with
Annexes and Protocol, signed at Mar del Plata on November 4,
2005 (Treaty Doc. 109-9).
VII. Appendix: Hearing--U.S.-Uruguay Bilateral Investment Treaty
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U.S.-URUGUAY BILATERAL INVESTMENT TREATY
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MONDAY, JUNE 12, 2006
U.S. Senate,
Committee on Foreign Relations,
Washington DC.
The committee met, pursuant to notice, at 3:03 p.m. in Room
SD-419 Dirksen Senate Office Building, Hon. Richard G. Lugar,
chairman of the committee, presiding.
Present: Senator Lugar.
OPENING STATEMENT OF HON. RICHARD G. LUGAR,
U.S. SENATOR FROM INDIANA
The Chairman. This hearing of the Foreign Relations
Committee is called to order. The committee meets today to
review the Bilateral Investment Treaty with Uruguay, which was
signed last fall. This agreement promotes investment and
economic cooperation with a friend and partner in the Western
Hemisphere. It would deliver important benefits to the United
States, and it would reinforce the significant economic reforms
that Uruguay has undertaken in the recent past.
The agreement has already been approved overwhelmingly by
both houses of the Uruguayan legislature. This support is a
measure of President Vazquez's political leadership and his
commitment to build a stronger political and economic
relationship between Uruguay and the United States.
More than 80 United States companies have operations in
Uruguay. The United States became Uruguay's largest export
market in 2004. In the absence of the Free Trade Agreements of
the Americas that facilitates trade on a hemispheric scale, we
should move forward where we can to create open markets on a
bilateral basis. Consequently, the United States should
consider whether the groundwork laid by this bilateral
investment treaty could be expanded into a full Free Trade
Agreement with Uruguay.
I encourage the administration to continue its successful
pursuit of bilateral investment treaties. These agreements open
opportunities for our domestic companies and establish greater
security for mutual investments. They promote open,
transparent, and nondiscriminatory treatment of private
investment, which is essential to ensuring that American
companies can compete equitably in foreign markets. Cooperation
on the commercial front also enhances our broader relationships
with other nations.
I welcome our distinguished witness, Mr. Daniel Sullivan,
and congratulate him on his recent confirmation as Assistant
Secretary of State for Economic and Business Affairs. The
committee looks forward to our discussion about the treaty. And
in a moment, we look forward to the testimony of Secretary
Sullivan. Would you please proceed and let me indicate at the
offset that your full statement will be made a part of the
record. You may deliver it in full or summarize, as you wish.
STATEMENT OF HON. DANIEL S. SULLIVAN, ASSISTANT SECRETARY FOR
ECONOMIC AND BUSINESS AFFAIRS, DEPARTMENT OF STATE, WASHINGTON,
D.C.
Mr. Sullivan. Thank you, Mr. Chairman. I would like to
just summarize the key points of my written testimony. And
thank you for the opportunity to testify before your committee,
today. The administration strongly recommends that the Senate
give its advice and consent to the U.S./Uruguay Bilateral
Investment Treaty. This treaty will protect the rights of U.S.
investors in Uruguay; create opportunities for U.S. exports to
Uruguay; and promote growth, economic reform and greater
awareness of the benefits of open investment and trade regimes
both in Uruguay and throughout the region.
This is also the first such treaty negotiated on the basis
of the new U.S. 2004 model BIT, which was developed in
consultation with this committee, other members of Congress,
the private sector, NGOs, and your staff. The new model BIT,
like the older one, is a valuable tool to promote sound
investment policies, and economic growth with our partners.
The 2004 model draws on our experience with the NAFTA and
is similar to the investment provisions in the FTAs that we've
been negotiating. It enhances the core investment principles
that have been the foundation of our BIT program for more than
20 years. The Uruguay BIT conforms closely to the new model.
Although Uruguay is a small country, it is an important
political and economic partner for the United States in the
Americas.
The United States is one of Uruguay's largest trading
partners, and President Bush and President Vazquez agreed last
month to broaden and deepen our economic and trading
relationship. A BIT with Uruguay would be an important
milestone in our growing economic partnership, will provide
strong protections for U.S. investors, and will reinforce
Uruguay's commitment to free and open trade in investment.
I thank the committee for its consideration of this treaty
and I will be glad to answer any questions that you may have.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Sullivan follows:]
Prepared Statement of Daniel S. Sullivan
Chairman Lugar, ranking member Biden, members of the committee, and
staff: Thank you for the opportunity to testify before the Senate
Foreign Relations Committee as the administration seeks the advice and
consent of the Senate to ratification of the U.S.-Uruguay Bilateral
Investment Treaty.
The administration strongly recommends that the Senate give its
advice and consent to the U.S.-Uruguay Bilateral Investment Treaty
(BIT). This treaty, the first negotiated on the basis of the text of
the new U.S. 2004 Model BIT, will protect the rights of U.S. investors
in Uruguay. It will also serve to promote a more open investment and
trade regime in the region and potentially more broadly in Latin
America.
The United States, with over $2 trillion invested abroad as of
2004, has a major stake in extending protections to our investors and
improving their access to foreign markets. The U.S. BIT program, which
has enjoyed bipartisan support throughout its existence, is a key tool
in that effort. Over the past 24 years, the BIT program has had the
same basic objectives: Protecting United States investment abroad;
encouraging the adoption of market-oriented investment policies that
treat private investment in an open, transparent, and non-
discriminatory way; and supporting the development of international
legal standards consistent with these policies.
The BIT program was initiated to promote and protect U.S. investors
in other countries by building on the principles contained in earlier
Treaties of Friendship, Commerce and Navigation (FCN). The program has
helped to reinforce sound investment policy in a variety of developing
nations and in economies that have undertaken the transition from
central planning. By creating conditions more favorable to U.S. private
investment, these treaties assist countries in their efforts to develop
the private sector, thereby strengthening their economies. Furthermore,
as more nations agree to conclude a BIT with the United States, the
important investment principles they contain gain wide acceptance and
contribute to the development of international law in directions
consistent with U.S. interests.
Since the inception of the Bilateral Investment Treaty program in
1982, the United States has concluded 46 BITs, 39 of which have entered
into force. We have active discussions underway with Pakistan and are
exploring potential BITs with several other countries. The Department
of State and the United States Trade Representative co-lead
negotiations with the support of Commerce, Treasury, and other
agencies.
BITs are negotiated on the basis of a model text that has been
periodically updated. The most recent revision of the model BIT was
completed in 2004, and, as noted earlier, is the model on which the
U.S.-Uruguay Treaty is based. The 2004 model text embodies the same
basic investment principles as its predecessors. It is similar to the
investment provisions of the North American Free Trade Agreement
(NAFTA) and, in keeping with our policy of maintaining consistency
across our agreements, is very similar to the investment chapters of
our recently-concluded free trade agreements, including those with
Chile, Singapore, five Central American countries and the Dominican
Republic (CAFTA-DR), Morocco, Australia, Oman, Peru, and Colombia.
In addition to containing greater specificity than earlier model
texts with respect to key provisions, our new model text contains
several clarifications and procedural innovations designed to eliminate
or deter frivolous claims and to make the investor arbitration process
more efficient and transparent.
Our BIT with Uruguay conforms very closely with the new model and
embodies the following core protections: (1) national treatment and
most-favored nation treatment both before and after the establishment
of an investment, which creates a level playing field for U.S.
investors; (2) a minimum standard of treatment based on customary
international law; (3) international law principles governing
expropriation; (4) limitations on performance requirements, such as
local content requirements; (5) the right to hire senior managers of
their choice; (6) improved transparency with respect to investment-
related laws and regulations; (7) a guarantee of free transfers of
investment-related funds; and (8) binding international arbitration of
investment disputes that can be invoked either by investors or by the
Parties to the agreement.
Although Uruguay is a relatively small country, it has long been an
important partner for the United States in the Americas. Our bilateral
economic relationship has grown more important in recent years. In
1998, Uruguay sent over 55% of its exports to Mercosur countries.
By 2004, the United States had overtaken Mercosur as Uruguay's
number one trading partner. The United States is also Uruguay's largest
single source of foreign investment, with an accumulated stock of
investment of over $600 million. Uruguay's GDP in 2005 was
approximately $16.8 billion; its GDP growth in 2005 is estimated to be
an impressive 6.6%, with export and investment growth rates of 16% and
20%, respectively. Uruguay's economy is projected to grow by 4.8% in
2006.
In 2004, the U.S.-Uruguay Joint Commission on Trade and Investment
launched the negotiations that led to this BIT, and the Treaty was
originally signed in Montevideo, just days before the election of the
new Uruguayan President, Tabare Vazquez, on October 31, 2004.
Following President Vazquez's inauguration in March 2005, his party
began to examine the BIT and its options for proceeding. In September
2005, President Vazquez requested that the United States make several
small changes to the text to accommodate Uruguayan concerns. The United
States was able to agree to two of these proposed changes, and the text
was altered and re-signed at the Summit of the Americas in Mar del
Plata, Argentina, on November 5, 2005. The Uruguayan Parliament
completed its domestic ratification procedures for the Treaty on
December 27, 2005. President Bush transmitted the Treaty to the Senate
on April 4, 2006.
The U.S.-Uruguay BIT differs in minor respects from the 2004 model
BIT text. None of these differences represent departures from core BIT
principles. The most important changes derived from Uruguay's desire to
maintain flexible oversight of its financial sector. For example, one
change prohibits all investor-state claims, except fro discrimination,
for negotiated sovereign debt restructurings carried out under
collective action clauses and certain other processes. Another
arbitration-related difference form the model bars U.S. investors from
submitting claims to investor-state arbitration if the investor or
enterprise had previously alleged the same breach of a BIT obligation
before a Uruguayan court or tribunal.
The Treaty text also includes a new clause to the Labor and
Investment Article clarifying that a Party may adopt any non-
discriminatory measure to ensure that investment is conducted in a
manner sensitive to labor concerns provided the measure is otherwise
consistent with the Treaty. This language is similar to the provision
in the model text on environmental concerns. Other changes include
relatively minor changes in defined terms, and other small, technical
changes. A full description of each part of the Treaty text, including
the departures from the model, has been included in the transmittal
package, immediately following the end of the Treaty text.
In conclusion, the U.S.-Uruguay BIT will help protect the rights of
U.S. investors in Uruguay; create more opportunities for U.S. exports
to Uruguay by stimulating our already strong bilateral economic ties;
and promote growth, continued economic reform, and greater awareness of
the benefits of open investment and trade regimes. In addition, the
U.S.-Uruguay BIT is the first of what we expect will be a new series of
BITs based on the 2004 model text--BITs that will have more robust
protections for U.S. investors than we have had in the past. These BITs
will preserve the legitimate regulatory prerogatives of the United
States and its negotiating partners, protect U.S. investors, and
promote open and fair investment policies around the world. I thank the
committee for its consideration of this treaty and I will be glad to
answer any questions.
The Chairman. Let me just indicate, as you've pointed out,
that the two Presidents met and discussed further deepening of
our relationship, especially our trading ties, specifically
now. I just raise the overall question, trying to outline how
the administration is proceeding to accomplish these goals. And
I touched upon this in the opening statement. After a
successful conclusion of this investment treaty, isn't a Free
Trade Agreement a natural step in the direction of deepening of
these ties? Wouldn't a free trade agreement with Uruguay be in
accordance with the U.S. Building Block Strategy in this
region?
Mr. Sullivan. Thank you, Mr. Chairman. As you know and as
you mentioned at the outset, the administration has been
pursuing policies to increase trade and investment throughout
Latin America through a number of different kinds of economic
tools. I should note that I think, in a lot of ways, we've made
significant progress in this regard. The statistic, I believe,
that is most informative is--if you looked at the current FTAs
that we either have, or that we are negotiating, or have
completed--that the economies represented by those FTAs would
account for over two-thirds of the GDP of the Western
Hemisphere, without including the United States. So, there's
been significant progress on that front.
As you mentioned, and as I stated in my opening remarks,
President Bush and President Vazquez met and committed to
deepening that economic relationship. The BIT is primarily the
way that we're looking at doing that right now. There are a
number of economic issues that can be addressed by the BIT, but
it will also, as you mentioned, help the economic reform
program that the Uruguayan government is committed to.
So, with regard to next steps in that relationship, the BIT
is the primary focus. Specifically, with regard to an FTA, as
you know, that is a process that requires significant
consultation. Oftentimes, looking at potential FTA partners,
there are a lot of issues that need to be addressed first, in
terms of economic or investment issues. But as you know, prior
to moving to an FTA, the consultation process on that decision,
not only includes our potential partners, but the Congress, the
private sector, and the interagency. And in terms of the
specific question regarding an FTA with Peru, I think it might
be a little bit premature to get into specifics, because I
think that we're kind of at the beginning stages of that
consultation process, Mr. Chairman.
The Chairman. Well, without pressing the issue, is the
Brazilian influence in the area a factor in consideration of a
free trade agreement? Does that play into the situation at all?
Mr. Sullivan. I think the answer to that is, we have said
and I believe Ambassador Portman has said, with regard to trade
in the Hemisphere, we welcome deepening our trading and
investment relationship with all countries including those in
Mercosur.
The Chairman. In which Brazil is a major factor.
Mr. Sullivan. That's right. That's correct. But, with
regard to whether or not there's a prospect--well, let me back
up here. With regard to the BIT, my understanding is that we
haven't heard anything with regard to whether or not the
Brazilian government has been supportive of this so we're
assuming that is has. As I mentioned, it's an important
building block.
So again, I want to get back to the point. It's more an
issue of going through the consultations that we need to do,
both in terms of domestic audiences, the Hill, private sector,
and our trading partners in the area to--where we would move
forward on that issue. So, I do not believe that the specific
issue of Brazil, with regard to that question, has been raised
and I am not aware of it.
The Chairman. For those listening to our dialogue and
hearing the word BIT used, let me just indicate, as you have
already, that this is the Bilateral Investment Treaty. And we
have such treaties with 39 countries, according to our
committee information.
What factors are a criteria for considering which countries
are going to be possibilities for negotiation of a Bilateral
Investment Treaty? And what was the impetus for seeking this
particular treaty with Uruguay at this time? Was it the meeting
of the two Presidents, or were there other factors that entered
into this?
Mr. Sullivan. Thank you, Mr. Chairman. With regard to the
general question, it's an especially important question now,
because, as I noted in my testimony, we have developed a new
model BIT and there's an interagency process that's ongoing,
again, with close consultation with this committee and
congressional staffs on possible future BIT partners, who we
would be considering.
So, some of the factors that are important in that
process--in that decision making process--include the depth of
the economic relationship, the commitment to reform that the
country that we would look at a possible BIT partner has, the
way in which U.S. investors have been treated in the country,
and key sectors in the country that we are considering, that
may be of interest, and more broader foreign policy
considerations.
One point that I want to emphasize is this idea of our BIT
not only as providing protection for U.S. investors, but also
as a vehicle to help drive economic reform programs. I think
that's very important. And so, the extent to which a partner
country is interested in a BIT is obviously a very important
issue that goes into the consideration of possible future BIT
partners.
With regard to your specific question, with regard to
Uruguay, a lot of those considerations that I mentioned, came
into play. As I mentioned earlier, a goal of the administration
has been to increase trade and investment throughout the region
and a Bilateral Investment Treaty is an important tool in that
regard. And we saw Uruguay as a very good candidate for a
number of the reasons again, that I have touched on. One of
which is, they were very interested in 2004, approaching the
administration with their interest in a Bilateral Investment
Treaty. Also, there is--as you mentioned--a significant amount
of economic reform being undertaken by the government, and we
thought that a BIT would enable that process to gain some
ground and to help in that regard. But also, more generally, in
terms of our economic relationship, we understand right now,
there are no investment disputes that we have involving any
U.S. investors. They have been a success story in terms of IPR
recently. They got off the 301 watchlist due to some of their
activities. Even in terms of areas like corruption, where I
think they ranked number two on the Transparency International
List for its very pro-anticorruption policies. So, it's a
number of these factors and given these factors, we thought it
was an important move to make now.
The Chairman. As you know, as countries have been evaluated
for the Millennium Challenge Account program, the corruption
factor is one that really is very large among many. But it is
one that has been difficult for some countries to meet. And by
the same token, the incentive to do so, has led to many
countries being interested in the program. But, you have
testified that this isn't the case for Uruguay. Uruguay ranks
second in terms of transparency. In other words, quite apart
from this new treaty, they have made a great deal of progress.
And I think that's an important point to make.
I would like to assess what kind of consultation process
the administration undertook. I'm not certain what you're
obligated to do under a bilateral investment treaty. You
indicated that under the free trade agreement, apparently much
more consultation with many parties, that you have enumerated,
is required. Who, in the private sector, are really involved in
the process of consultation? Does the 2004 model on which this
agreement is based, reflect private sector input? Finally, is
there private sector support for the treaty that you are
presenting this afternoon?
Mr. Sullivan. Thank you, Mr. Chairman.
To answer your last question first, there is private sector
support for this treaty. With regard to the consultations on
the model BIT, as I believe you know, it took a fair amount of
time to actually develop and come to agreement on different
elements of the final model, that was produced in 2004. That
consultation process--it took some time, because it involved a
number of different parties. It involved a very robust
interagency process, where different agencies weighed in on
their different concerns. It also involved a significant
consultation with the Congress, and members, and staffs. We
were also guided in part by the TPA legislation, which had a
number of provisions that were guiding new trade agreements.
Additionally, it included private sector involvement and
civil society, the specific individual private sector entities.
I do not have that at my fingertips, but I'd be glad to take
that for a submission----
The Chairman. And share that for the record.
Mr. Sullivan. Yes, sir. We'll make sure we get back to you
both in terms of that and then, the other NGO group, but the
consultations were, as I mentioned, quite robust across a broad
section and I believe that there is a lot of different
interests involved, but I believe that we have struck a balance
that has primarily succeeded in gaining support from all these
groups.
The Chairman. Has there been some manifestation of that
support of the individual firms? Have entities endorsed this
treaty?
Mr. Sullivan. Mr. Chairman, again, I'll take that for
submission. I know that, in general, the private sector support
for this treaty has been strong. As to specific firms, I will
take that for submission and get back to you on that.
[The additional information referred to above follows:]
Additional Information Submitted in Response to Senator Lugar's
Question
Mr. Sullivan. The Uruguay bilateral investment treaty is the first
negotiated on the basis of the 2004 U.S. model text. In developing the
model, the administration undertook extensive consultations with a wide
range of private sector groups, as well as the Congress. We received
input from private sector advisory bodies including the State
Department's Advisory Committee on International Economic Policy, and
the Industry Trade Advisory Committees administered by the Office of
the U.S. Trade Representative and the Department of Commerce.
Collectively, these groups encompass hundreds of representatives of
interested constituencies, including business groups, trade unions, and
other elements of civil society. In addition, several firms and
organizations provided input in their individual capacities. To
facilitate these consultations, we posted a draft of the model text on
the State Department website in early 2004, while its development was
underway.
Business associations involved in these consultations included the
American Council of Life Insurers, the Emergency Committee for American
Trade, the National Association of Manufacturers, the National Foreign
Trade Council, the U.S. Coalition of Services Industries, and the U.S.
Council of International Business. These groups represent a wide
spectrum of U.S. businesses ranging from consumer products,
manufacturing, and financial services, to energy sectors.
Labor, environmental, and other civil society groups involved in
these consultations included AFL-CIO, the Center for International
Environmental Law, Earthjustice, Friends of the Earth, Georgetown
University Environmental Policy Project, Oxfam America, National
Wildlife Federation, National Resources Defense Council, and the Sierra
Club.
All of these groups made important contributions that helped to
inform our work on the new model investment treaty, which was concluded
in late 2004.
With respect to the Uruguay BIT in particular, we briefed private
sector advisers through the Industry Trade Advisory Committee on the
negotiations and consulted them on requests by Uruguay to depart from
the model text.
Specific groups that have expressed support for the Uruguay BIT
include the Emergency Committee for American Trade, the National
Association of Manufacturers, and the U.S. Council for International
Business.
The Chairman. For that matter, with trade groups and
aggregates of firms, has someone spoken favorably about this? I
presume then, that you have an affirmative answer to this
question. Do private American investors feel secure in this
treaty? Do they believe that this treaty offers them the
protection that they would need in order to have--to use your
terms--a robust relationship back and forth with Uruguay?
Mr. Sullivan. I think the answer to that, Mr. Chairman, is
yes. The provisions--and I layout the provisions in my written
statement--the eight core principles that are in this treaty
that offer protection to private sector individuals. Really the
essence of the treaty is the protection of investor rights, the
opportunity to settle disputes, either through the domestic
courts in Uruguay or through binding international arbitration.
And that is a key component of this treaty. I might add, that
with regard to the support that we've seen, one of the reasons
is because there have been improvements in this treaty versus
the previous model BIT. Both this treaty and the previous model
BITs have the eight core protections, core principles that I
mentioned in my opening statement, and we can discuss those if
you have any questions on the particulars. But, where we think
there's been improvement, is in the areas that have been of
concern to investors, such as transparency. There are a number
of provisions that make the process more transparent. And also
in terms of the arbitration process itself, it clarifies some
of the rules. It offers the opportunity to get rid of frivolous
claims.
And so, the improvements that we think that build on this
treaty from the previous model BIT, have engendered generally
widespread support. So, we're confident that in a number of
sectors, the support is very strong.
The Chairman. Now sometimes, even though we may have the
best of intentions, there are things that go awry. An
arbitration process is set up in previous bilateral investment
treaties, as well as in this one. What has been the experience
as you've examined the bilateral investment treaties in the
past? Has the arbitration mechanism worked in ways that were
beneficial to the United States, and at a minimum, provided
fairness to our interest?
Mr. Sullivan. Yes. In general, the arbitration procedures
have been followed and again--now sometimes, it's a lengthy
process, which can be somewhat problematic--but in general, the
arbitration procedures have been followed and they've also in
general, been able to get investors the action and the justice
really, that they have sought.
And again, I want to go back and emphasize the importance
of having that option to make a choice between the domestic
court of the country in which that individual is investing,
binding international arbitration. And so having that option,
is something that's the essence of the treaty. But the history
of the program and our relations and in terms of where we have
had other BITs, the BITs actually have been quite successful.
The Chairman. During your negotiation of this treaty, can
you describe the kinds of investments in which the United
States is involved? I mentioned in the opening statement that
there are as many as 80 companies. But, what sort of industries
are most prominent in this? What are the logical aspects of the
flow of trade between the United States and Uruguay? What do
they export to us and what do we export to them? In terms of
pure financial arrangements, what kind of mechanisms are likely
to be set up between the two countries that would be
advantageous?
Mr. Sullivan. Thank you, Mr. Chairman. Our exports in 2005
totaled about $260 million to Uruguay, that was primarily in a
number of high-tech goods, TV equipment, medical equipment. It
is important to note that--and again, this is another reason we
think this is an important treaty, U.S. exports are up--
although from the small number, they're up by about 50--over 50
percent since 2002. So, we see that oftentimes what the case
is, is that investment in a foreign country can be a platform
for additional exports from the United States. And I think in
this case, there's an opportunity to see that.
So, we also have investments in the financial area within
Uruguay. And, although I do not believe that we have any large
scale investments in any kind of energy sector there, an area
in which I know you are very focused, a lot of the BITs that we
have the individual investor is using the BIT as you know in
the energy sector. Now, what we do have, in terms of the energy
sector with Uruguay, is that they have been a purchaser also of
energy equipment.
The Chairman. Yes.
Mr. Sullivan. That's an area of U.S. exports that has the
potential to grow. Finally, it's not just investments, but one
important element of the revised model BIT, is that if there
are large service contracts between a government--the Uruguayan
government--and an investor. So, those kind of large--so, for
example say some kind of energy related service contract, that
kind of contract would actually fall under the provisions of
the BIT. So, it's fairly robust in terms of the different areas
in which U.S. companies would be engaged, or could be engaged.
And again, I think that's another reason why we believe this is
a strong treaty.
The Chairman. This is a topical--almost current events
question, as opposed to a broader problematic or philosophical
one. In the past three weeks, many of the currencies in Latin
America have been under stress. That has been true of
currencies in other parts of the world. This may lead, during
the latter part of the week, to central banks in six countries
raising their interest rates very substantially.
I'm curious whether Uruguay is undergoing such a
predicament presently. That is, is it experiencing rapid
declining currency or fears of either inflation or of liquidity
being terminated? If so, what effect is this likely to have in
terms of the debate on this treaty in either country?
Mr. Sullivan. Mr. Chairman, with regard to the specific
question, again, I'll--I'd like to take that for the record in
terms of the specifics of the Uruguayan currency and what the
situation is going--well, with regard to their financial
markets.
[The information referred to above follows:]
Additional Information Submitted in Response to Senator Lugar's
Question
Mr. Sullivan. Many emerging-market currencies have depreciated over
the past month. We have also seen volatility in emerging-market stocks
and sovereign bonds in recent weeks. These developments are a reminder
of the risks of investment. The government of Uruguay ratified the BIT
before the most recent market turbulence; so it did not affect the
debate in Uruguay.
I would like to point out that while many emerging-market
currencies depreciated in recent weeks, the Uruguayan peso has remained
quite stable. The Uruguayan economy has made a strong recovery since
the financial crisis of 1999-2002. Most analysts expect real GDP growth
of close to 5% this year, and annual inflation is running at about 6%.
While the economy still has some vulnerabilities, the government of
Uruguay has taken many steps to improve the strength of the financial
system.
I should note that although we have been discussing BIT protections
for foreign direct investment, portfolio investments, such as stocks
and bonds, are also covered by the BIT. Together with the provision
guaranteeing unrestricted transfers related to an investment, the BIT
limits capital controls on covered portfolio investments. Such
protections make it less likely governments will resort to controls,
which can serve to exacerbate a crisis, and correspondingly can
reassure investors, making it less likely they will act precipitously.
The BIT also addresses sovereign debt restructurings that can
result from financial crises. If those restructurings are carried out
under collective action clauses and certain other processes, the
Uruguay BIT prohibits investors from filing claims, except for cases of
discrimination. We believe that by supporting collective action clauses
we help ensure orderly debt restructurings, which benefit investors and
debtor nations.
Of course, while a BIT provides significant benefits to investors,
it cannot create an investment environment that is entirely free of
exchange-rate risk, default risk, or other risks.
Mr. Sullivan. But, the broader point that's raised, is an
important one and it does relate to a provision in the BIT. In
one of those provisions, is--and I believe, it goes to both
Uruguayan and U.S. support for the agreement, but one of the
provisions in the BIT that's been negotiated, which again, does
not affect the core eight principles, but it is an important
departure, that's important to highlight. And I did highlight
it in my written testimony, was with regard solving debt
restructuring with the Uruguayan's and to the degree to which,
if that is done per the terms of the instrument, that that--
those kind of activities would not fall within the provisions
of the BIT, unless there was a claim by an investor that there
was some kind of discriminatory practice.
So, unless that claim can stand a broader solving debt
restructuring, would not be subject to the scope of the BIT and
I believe that this was a provision that Uruguayan's were
interested in, because it relates to some of the issues that
you're talking about, which is to have, in your minds,
flexibility to address potential financial emergencies and
other issues with regard to financial crisis and our
negotiators accepted that as important--as an important point
for them.
The Chairman. So, translating this into less technical
terms, it would mean, that United States investors still need
to venture into the Uruguayan market, eyes wide open, with an
idea of the debt structure of that government, and likewise its
currency, because this treaty creates flexibility, in the event
that Uruguay needs it to manage its situation. This could lead
to a reduction in value of the currency or some type of
restructuring of the debt, that could create some economic
losses for an American investor or anybody else, including
Uruguayan investors in this situation.
So, what you're saying is that the treaty, with respect to
the Uruguayans in particular, recognizes that this is a
difficult world, that restructuring and changes sometimes
occur, and it provides for that flexibility. And so, we
understand that, eyes wide open, as we enter into this treaty?
Mr. Sullivan. That's correct, Mr. Chairman. And that's an
excellent point. The provisions of the BIT, as I mentioned,
focus on the eight core principles, but there are some areas in
which there are some exceptions and they're narrow and we tried
to make them as narrow as possible in the treaty and it is
important for investors to be aware of what these are, because
it could affect their ability to bring actions under the BIT.
And so, this one, the one that you have raised, particularly
given this situation, and the condition of some of the other
developing country economies is an important one to note.
The Chairman. Correspondingly, I think from the standpoint
of Uruguay, it ought to be pointed out that investors in our
U.S. Treasury bonds, of which there are many coming from all
over the world presently, accept the fact that the dollar may
go up or down. That's the value of what they hold. But, that is
taken for granted in the United States, in a very transparent
set of markets everyday with futures markets and indicators of
which way the winds may be blowing.
Mr. Sullivan. Yes, sir.
The Chairman. It is a world of risk when it comes to
current financial transactions involving currency quite apart
from investments in real material--real estate.
Well, I thank you very much for your testimony and your
forthcoming responses. Do you have any other comments that you
want to make for the benefit of the record before we conclude
our hearing?
Mr. Sullivan. I would like to make one comment and again,
Mr. Chairman, it goes to some of the current events that are
occurring in the region. You see what is a slightly troubling--
not slightly--a troubling trend within the region with regard
to expropriation and nationalization with certain countries.
This kind of BIT, this kind of investment treaty is designed
exactly to address these kinds of situations and therefore,
although those kind of circumstances do not exist between the
United States and Uruguay, it is important to recognize the
broader intent of the Bilateral Investment Treaties and the
importance both in terms of protecting investor rights, but
also in terms of ensuring that when there are problems that we
are seeing in other countries, that having a protection of this
kind of treaty, is extremely valuable to both--primarily to the
American investors, but also to the economies of the countries
in which they're investing.
So, I would just like to conclude on that point, sir.
The Chairman. Well, it was an excellent point on which to
conclude. I think we are all delighted to note the very fine
visit by the distinguished President of Chile with our
President last week and the reaffirmation of the strength of
that relationship, which has been based upon the principles we
have discussed today, and maybe even some beyond, and offers a
source of influence in highlighting in South America at this
point that the Uruguayan friendship certainly is another one in
which we celebrate. We are hopeful we may be able to take
action upon this treaty promptly.
I would ask that the record be kept open for the rest of
today for other questions or testimony by members who were
unable to attend and likewise, that as rapidly as possible you
submit for the record the responses to questions that we have
raised today and that you indicated your willingness to respond
to.
Mr. Sullivan. Yes, sir.
The Chairman. Having said that, we appreciate your coming
and the hearing is adjourned.
Mr. Sullivan. Thank you.
[Whereupon at 3:37 p.m., the hearing was adjourned.]
----------
Responses to Additional Questions Submitted for the Record to Assistant
Secretary Daniel Sullivan by Members of the Committee
Responses to Questions Submitted by Chairman Lugar
Question. Article 24.1 of the U.S.-Uruguay BIT, Investor-State
arbitration, with respect to breaches of ``investment agreements'' with
a national authority is available ``only if the subject matter of the
claim and the claimed damages directly relate to the covered investment
that was established or acquired, or sought to be established or
acquired, in reliance on the relevant investment agreement.'' This
provision diverges from the Model BIT. How will this affect the ability
of investors to resolve disputes with national authorities?
Answer. The quoted language from Article 24.1 is the same as that
found in the model BIT, and therefore does not represent a departure.
The same language can also be found in our recent free trade agreement
texts. This provision clarifies that for claims for breach of an
investment agreement, the claimant must allege that both the subject
matter of the claim and the alleged damages ``directly relate'' to the
covered investment made in reliance on the relevant investment
agreement. In other words, a claim for breach of an investment
agreement can be made if the subject matter and damages relate to a
covered investment (for example, a claim that failure to perform
affected, and caused damages to, a covered investment, which depended
on such performance), but not if they relate to aspects of the
investment agreement that do not have a significant connection to the
covered investment (for example, a claim for contract damages stemming
from simple failure to perform pursuant to a specific term that was not
a significant basis for the establishment or acquisition of the covered
investment).
Question. There have been criticisms from the U.S. business
community, who BITs are intended to protect, that the model and new
direction of BIT negotiations are trending towards ``defensive
concerns'' at the expense of the U.S. community investing overseas. Can
you address this criticism, and if you find it to be inaccurate, please
explain why.
Answer. We believe that the model BIT and the Uruguay BIT reflect
long-standing U.S. policy of concluding investment treaties that
provide meaningful, high-standard protections to U.S. investors. The
Uruguay BIT adheres closely to the text of the model BIT, which was
developed in close consultation with Congress, the business community,
and other stakeholders. The model BIT includes strong provisions on the
free transferability of funds, standards for expropriation and
compensation consistent with U.S. legal principles and practice,
national treatment and most favored nation treatment, limits on trade-
distorting performance requirements, investor-state arbitration and
other core protections. The model also contains clarifications of key
substantive provisions, such as expropriation and the minimum standard
of treatment, and new procedures to eliminate frivolous claims and make
the arbitration process more efficient and transparent. In developing
the model, we took account of our experience in defending claims
against the United States under the investment chapter of the North
American Free Trade Agreement. In addition, we took into account the
negotiating objectives on investment contained in the Trade Promotion
Authority Act of 2002, as our objective is to maintain consistency
between our BITs and our free trade agreement investment chapters.
Question. Can you explain the relationship between the investment
chapters of free trade agreements and BITs generally? How about
specifically in terms of dispute resolution procedures? Will investors
be able to determine without difficulty which dispute settlement
procedures are available to them at any given point in time of their
investment?
Answer. U.S. free trade agreements (FTAs) with investment chapters
contain the same basic protections as U.S. bilateral investment
treaties (BITs), and many of their core provisions use identical or
nearly identical language. When we negotiate an FTA with a country with
which we have a pre-existing BIT, we consider whether it is desirable
to include an investment chapter to update our investment commitments
to more closely reflect our present standards. We consider factors such
as the level of investor protection afforded by the pre-existing BIT
and the likelihood of successfully negotiating higher standards in a
new FTA. We did not include an investment chapter in our FTA with
Bahrain, with which we have a BIT, but we did include one in our FTA
with Morocco, also a BIT partner, and in the Central American-Dominican
Republic Free Trade Agreement, where we have a BIT in force with
Honduras.
If there is a pre-existing BIT, and a new FTA that includes an
investment chapter is negotiated, our practice has been to make the FTA
effectively supersede the BIT. This is accomplished by the two Parties
mutually agreeing to suspend dispute settlement under the BIT. A key
exception to this suspension, however, is that BIT dispute settlement
provisions continue to apply, for a period of 10 years, to covered
investments and those BIT disputes that existed prior to the entry into
force of the FTA. This exception ensures that investors who invested
prior to the FTA continue to have access to dispute settlement under
the BIT for 10 years after entry into force of the FTA. These investors
have the choice of access to dispute settlement either under the BIT or
the FTA during the 10-year period. Disputes arising after entry into
force of the FTA involving investment made after the entry into force
of the FTA may only be brought under the FTA. After the 10-year period,
no dispute that arose before entry into force of the FTA may be taken
to arbitration under the BIT or the FTA, and all disputes that arise
after the 10-year period may only be brought under the FTA. These rules
are described in the text of the Morocco FTA (Article 1.2(3)-(5)), and
in an August 5, 2004 exchange of letters with Honduras, respectively.
Both texts are available on the website of the Office of the U.S. Trade
Representative.
Question. Article 5 of the 2004 Model revises the provisions for
minimum standard of treatment. One of the specific criticisms of this
alteration is that there is not a clear definition in international law
for minimum standard treatment of aliens. Can you explain the thought
process behind the revision of this provision and include your
understanding of minimum standard of treatment of aliens?
Answer. In developing the 2004 model BIT, we sought to clarify that
the obligation set forth in Article 5 prescribes the customary
international law minimum standard of treatment of aliens as the
minimum standard of treatment to be afforded to covered investments. In
addition, Article 5 contains greater detail than prior models
concerning ``fair and equitable treatment'' and ``full protection and
security,'' and provides that these concepts do not expand the Parties'
obligations beyond those required under the customary international law
minimum standard of treatment of aliens. These clarifications in part
reflect our experience with international arbitration under Chapter 11
of the North American Free Trade Agreement (NAFTA). These
clarifications also track the July 2001 interpretation of the NAFTA
Free Trade Commission, which is comprised of the three government
Parties to the NAFTA, regarding a similar Minimum Standard of Treatment
article in the NAFTA. Customary international law, by definition, may
evolve over time. Any attempt to provide more specificity on the
customary international law minimum standard of treatment of aliens in
the BIT text could risk denying investors the benefits of the
protections provided by customary international law, as it may continue
to evolve.
Question. Does Article 30, Governing Law, in effect, give the
respondent state the ability to turn an investor-State case into a
State-State case? If not, please explain why not.
Answer. Articles 30.1 and 30.2 specify the law a tribunal must
apply to investor-State disputes. If the two government Parties seek to
address an interpretive issue regarding a provision of the Treaty, they
may do so in accordance with Article 30.3, which ensures that arbitral
tribunals respect the intent of the two Parties that entered into the
Treaty. It allows the Parties to issue a joint decision, binding on
tribunals, expressing the Parties' interpretation of a provision of the
BIT. By exercising this right, Parties to the BIT may, by their
agreement, affect the way in which the treaty is interpreted by an
investor-State tribunal. However, this does not change the nature of
the dispute from one between an investor and a Party to the BIT. The
fact that the Parties to the BIT do not issue a joint interpretation in
a particular circumstance does not necessarily imply any disagreement
with respect to the interpretation of the treaty that would suggest the
possibility of a State-State dispute. It may simply reflect that the
Parties see no need to clarify their interpretation of the text.
__________
Responses to Questions Submitted by Ranking Member Biden
Question. You stated in your testimony that ``by 2004, the United
States had overtaken Mercosur as Uruguay's number one trading
partner.'' According to the CIA publication ``The World Factbook''
(2005), in 2003 the United States was the third largest exporter to
Uruguay, and the second largest market for products from Uruguay. What
caused the significant expansion of trade between the United States and
Uruguay in 2004? In what sectors, in particular, did this expansion
occur?
Answer. In 2004, the United States became Uruguay's largest export
market, followed by Brazil and Argentina. In 2005, Uruguayan exports to
the United States grew further and almost reached total sales to
Mercosur (the Southern Cone Common Market, consisting of Argentina,
Brazil, Uruguay, and Paraguay, to which Venezuela has just been
admitted as a full member). In 2005, Uruguay sold $760 million to the
United States (22.4 percent of total exports), $781 million to Mercosur
(22.9 percent) and $587 million to the EU (17 percent).
The surge in sales in recent years was led by rising exports of
beef--Uruguay's traditional export--and gasoline. Although Uruguay is a
net importer of crude oil, it has excess refining capacity and is a net
exporter of gasoline. U.S. imports of petroleum products from Uruguay
increased from none in 2003 to $97.5 million in 2005. Beef sales rose
significantly beginning in 2003, when the United States reopened its
beef market after Uruguay contained an outbreak of foot-and-mouth
disease. In 2005, beef sales accounted for 60 percent of total exports
to the United States, and gasoline sales 17 percent. U.S. exports to
Uruguay--which consist mainly of high-tech goods like computers, radio/
TV equipment, telecommunications equipment, and medical equipment--
dropped significantly in 1998-2002 following a steep economic crisis,
and resumed growth in 2003. U.S. exports rose 60 percent in 2003-2005.
Question. Are there any outstanding commercial disputes or
expropriations claims involving the government of Uruguay (or an agency
of that government) and U.S. firms? If so, please provide summary
information about each dispute or claim, and the current status
thereof.
Answer. We are not aware of any outstanding commercial disputes or
expropriation claims between U.S. persons and the government of Uruguay
or its agencies.
Question. Please provide a general summary of the investment
climate in Uruguay for foreign direct investment, as well as a summary
of the investment climate in Uruguay for U.S. firms.
Answer. The Government of Uruguay acknowledges the important role
that foreign investment plays in economic development and works to
maintain an open investment regime. Uruguay's 1998 Investment Law (no.
16906) declares that the promotion and protection of national and
foreign investment is in the national interest. The law provides for
national treatment, supports the establishment of foreign investment in
country, and provides for the repatriation of capital and profits from
investments. The law provides for 100 percent foreign ownership of
investments, except where restricted for national security purposes.
Uruguay maintains few restrictions on foreign investment and generally
does not require that firms receive specific authorizations to invest.
Uruguay has a history of state monopolies in a number of areas,
such as telecommunications and energy. However, in the past two decades
the government has undertaken a privatization process to increase
private sector participation in these areas. In the telecommunications
sector, Uruguay maintains a monopoly on basic telephone services but
has opened wireless services to private competition. The energy
generation, petroleum, transportation, sanitation and financial
services industries are all characterized by varying degrees of
government involvement or monopolization, but are increasingly open to
private investment.
U.S. firms have generally encountered few major obstacles to
investing in Uruguay, but have noted difficulties with bureaucratic
procedures and tenders, and with numerous changes in tax codes and
regulations since 2001. The World Bank's ``Doing Business'' report,
which ranks countries according to the quality of their investment
climates, ranks Uruguay 85th globally and 9th regionally of 155
countries surveyed. The annual report of the U.S. Embassy in Montevideo
concerning Uruguay's investment climate is available on the website of
the U.S. State Department (http://www.state.gov/e/eb/ifd/2006/
62048.htm).
Question. How does this treaty assist U.S. firms protect their
intellectual property rights in Uruguay?
Answer. BITs comprise one element of our efforts to protect U.S.
intellectual property rights abroad. Consistent with long-standing U.S.
BIT practice, the treaty's definition of ``investment'' lists
``intellectual property rights'' as one of the forms that an investment
may take. Thus, where an investor owns or controls an intellectual
property right that is, or is part of, a covered investment, it is
subject to BIT protections.
Question. The definition of ``covered investment'' in the 2004
model BIT, and in this treaty, provides that it applies to investments
``in existence as of the date of entry into force of this Treaty or
established, acquired, or expanded thereafter.'' This language is not
contained in the 1994 model BIT. Is there a material difference between
the language contained in this definition from the 1994 model and the
2004 model BIT?
Answer. The 1994 model BIT defines ``covered investment'' in
Article I as ``an investment of a national or company of a Party in the
territory of the other Party.'' Article XVI, paragraph one, of the 1994
model provides that the BIT ``shall apply to covered investments
existing at the time of entry into force as well as to those
established or acquired thereafter.'' The 2004 model BIT consolidates
both concepts in the definition of ``covered investment,'' which in
substance is not a change from the 1994 model.
Question. Article 1 defines ``investment'' as an asset that ``has
the characteristics of an investment.'' What does that phrase mean? Is
that not a tautology? Please provide examples of an asset owned by an
investor that would not satisfy this requirement.
Answer. The forms that investment may take evolve over time, in
response to changed economic and legal circumstances. For this reason,
and consistent with long-standing U.S. BIT practice, the definition of
``investment'' is intentionally broad. The definition does, however,
provide guidance on what constitutes an investment, notably by
identifying certain ``characteristics'' of an investment, and setting
out an illustrative list of forms that an investment may take.
Additional elaboration is provided in several footnotes to the
definition. Among other things, these footnotes set forth the types of
debt that are less likely to have the characteristics of an investment;
state that investments do not include claims to payment that are
immediately due and result from the sale of goods or services, or
orders or judgments entered in judicial or administrative actions; and
provide that licenses, authorizations, permits, and similar instruments
do not have the characteristics of an investment if they do not create
any rights protected under domestic law. In general the definition
provides more elaboration on the concept of ``investment'' than the
prior 1994 model. At the same time, the definition is broad enough to
encompass the evolving nature of investment throughout the life of the
treaty.
Question. Article 21 contains several departures from the model
BIT. Please explain the rationale for these departures, and the
benefits to the United States that result.
Answer. Article 21 addresses the coverage of the BIT with respect
to taxation measures. The principal departure from the U.S. model in
this article is found in paragraph 2, and it is an area where the
Uruguay treaty provides a higher level of investor protection than the
model. This paragraph provides that the national treatment and most-
favored-nation treatment obligations shall apply to all taxation
measures, other than those relating to direct taxes (such as taxes on
income, capital gains, and inheritances), and subject to other
limitations. In other words, the Uruguay BIT provides protection
against indirect taxation measures (such as excise or value-added
taxes) that discriminate based upon nationality. We have included this
provision in recent U.S. free trade agreements containing investment
chapters and in the North American Free Trade Agreement, and we
consider on a case-by-case basis whether to include it in individual
BIT negotiations. In making the decision we consider factors such as
U.S. investor interest in the protection and whether comparable
provisions are contained in a tax convention between the United States
and the other country. We do not presently have a tax convention with
Uruguay.
Paragraphs 5 and 6 of Article 21 clarify the application of dispute
settlement provisions to taxation measures alleged to be a breach of
treaty obligations or an investment authorization or investment
agreement. This is not a substantive change from the model, as the same
substantive effect is achieved through paragraph 1 of Article 21 in the
model. Our model BIT was not completed until after the Uruguay text was
tabled and these paragraphs are intended to be consistent with our
approach to this issue in the model.
Question. Annex F is a significant departure from the model BIT.
Please explain the rationale for this departure, and the benefits to
the United States that result.
Answer. A leading priority of Uruguay in the BIT negotiation was to
ensure the government's ability to regulate financial services and
financial institutions in appropriate ways consistent with the treaty.
This is reflected in Annex F, which contains additional provisions on
financial services.
The first two paragraphs of the annex clarify the shared
understanding of the Parties concerning the relative standards of
treatment to be compared in analyzing national treatment and most-
favored-nation treatment with respect to financial institutions.
Similar language is found in the financial services chapters of recent
U.S. free trade agreements (FTAs) and the North American Free Trade
Agreement (NAFTA). This language is intended to help ensure proper
application of these obligations in the financial services sector. The
United States agreed to this language because Uruguay requested it and
it was consistent with our interpretation of the provisions in the text
that it is intended to clarify.
Both the United States and Uruguay believed that State-State
arbitration, rather than investor-State arbitration, should be the sole
means of dispute settlement for claims relating to the treaty's
national treatment or most-favored-nation treatment obligations for
measures relating to financial institutions. This rule is reflected in
paragraph 4 of the Annex. Language to the same effect is found in
recent U.S. FTAs with investment and financial services chapters, as
well as the NAFTA. This rule can help to prevent inappropriate claims
of discrimination based on nationality in response to regulation in the
financial sector, by vesting the decision of whether to submit a
dispute in the hands of the investor's home country. The United States
determines on a case-by-case basis whether such a provision should be
tabled in individual BIT negotiations. In making this judgment we
consider factors such as the U.S. investor interest, the nature of the
other country's financial regulatory regime, the preference of our
negotiating partner, the concerns of U.S. financial regulators, and
whether investor-State arbitration is needed to protect the rights of
U.S. investors in financial institutions of the other country. Even
where the United States proposes this exclusion from investor-State
arbitration for claims relating to U.S. measures in this sector, we
allow for the possibility that our negotiating partner might choose to
have investor-State arbitration apply to such claims for measures
relating to its own financial institutions.
Finally, paragraph 5 of the annex clarifies that the treaty does
not prevent a Party from taking measures relating to financial
institutions that are necessary to secure compliance with laws or
regulations that are not inconsistent with the Treaty, such as measures
relating to the prevention of deceptive and fraudulent practices. This
language, which was proposed by Uruguay, is also found in the financial
services chapters of recent U.S. FTAs and is consistent with our
interpretation of the relevant provisions in the text.