Foreign Investors Gone Wild
by Sarah Anderson, Alternet
www.zmag.org/, May 8, 2007
When Bolivian President Evo Morales took
office in January 2006, he pledged to follow through on his campaign
pledge to increase Bolivians' share of revenues from their major
source of foreign income, natural gas. International gas companies,
however, threatened to sue. Previous Bolivian governments had
signed a flurry of bilateral investment treaties that gave foreign
investors the right to bypass domestic courts and file such lawsuits
through international tribunals. Morales complained that these
rules made him feel like a "prisoner" in the presidential
The Bolivian president's predicament is
a common one for political leaders around the world. They are
caught in an interlocking web of rules and institutions that promote
and protect foreign investment -- with little regard for the costs
to democracy, the environment, or the public welfare. These increasingly
controversial investor protections have become the "get out
of jail free" card for corporations in the global economy.
They are promoted by the World Bank and other international financial
institutions, codified by bilateral investment treaties and free
trade agreements, and enforced through the World Bank's arbitration
court and other international tribunals.
Countries are pushing back against these
investor protections. They might be able to find common cause
with some in the U.S. Congress. But the deep pockets of the corporations
and the rigged rules of the global economy pose significant obstacles.
Investors Über Alles
Armed with unprecedented legal powers,
foreign investors have literally gone wild. They can sue over
alleged violations of a long list of protections. The most controversial
guard against government actions, including environmental and
public health laws, that diminish the value of their investment.
While international arbitration judges cannot force a country
to change its laws, they can award massive damages to the investor.
And that threat alone can have a chilling effect. A U.S. chemical
corporation, for example, succeeded in using investment rules
in the North American Free Trade Agreement (NAFTA) to pressure
Canada to repeal an environmental health regulation.
In the Bolivian gas case, the Morales
government dismissed the threats and managed to renegotiate contracts
with all the foreign investors, substantially increasing the governments'
revenues. Other leaders have not been so fortunate. In nearby
Argentina and Ecuador, for example, governments are facing potentially
crippling "investor-state" lawsuits.
Argentina has been socked by more than
30 such claims, many of them in retaliation for measures to alleviate
the pain of the country's 2002 financial meltdown. A U.S.-based
gas company, for example, sued over an emergency law that froze
utility rates to protect consumers from runaway inflation. The
company, CMS Gas, won $133 million in compensation, money that
could have compensated Argentine consumers.
Ecuador is facing a $1 billion suit by
Occidental Petroleum, a company widely reviled in that country
for alleged human rights and environmental abuses, including using
child labor to clean toxic materials, failing to repair pipeline
leakages, and operating in protected indigenous lands without
Occidental's critics cheered when the
Ecuadorian government gave Occidental the boot in 2006, charging
that it had violated its contract by transferring a share of production
to another foreign firm. The Bush administration immediately suspended
trade negotiations with Ecuador, while the IMF entered the fray
by advising the government to begin accumulating reserves to pay
off a possible damages award. Ecuador's Attorney General responded
by accusing the IMF of "hateful partiality in favor of interests
that have seriously hurt" the country.
In another case with disturbing human
rights implications, Italian investors are targeting post-apartheid
affirmative action policies in South Africa. They are suing over
a law designed to redress historic racism by requiring mining
companies to have 26% black ownership and 40% black management
by the year 2014. These policies, the investors claim, violate
protections against expropriation and discrimination in the Italy-South
Africa bilateral investment treaty.
Currently, there are more than 100 cases
pending before the World Bank's International Centre for Settlement
of Investment Disputes (ICSID), which decides most investor-state
disputes. More than 90% have been against developing countries.
Meanwhile, these rules are not delivering increased foreign investment.
Tufts University researchers recently found that signing bilateral
investment treaties with the United States had no effect on Latin
American and Caribbean investment flows. In fact, Brazil, which
has refused to sign any such deal with the United States, is by
far the region's biggest recipient of U.S. investment.
Rich Countries Not Immune
Canada currently faces a case in retaliation
for terminating a project to transport garbage from Toronto to
an abandoned open pit mine 600 kilometers (370 miles) away. To
protest the mega-dump, the nearby Algonquin indigenous community
joined with farmers and other local citizens in a railroad blockade
that was the largest act of civil disobedience in the history
of Ontario province. When the government responding by dropping
the plan, it offered some compensation to the mine owners. But
one U.S. investor is still using NAFTA to sue for lost potential
In another case affecting indigenous rights,
the U.S. government is currently defending against a Canadian
company's suit over regulations to reduce the environmental damage
of a gold mining project on Quechan lands in southern California.
U.S. officials have met some resistance
in their efforts to expand these investment rules. Their demand
to include sweeping investor protections in the Free Trade Area
of the Americas was one factor in the collapse of those negotiations,
after 11 years of talks involving 34 countries. Similar proposals
to incorporate such rules in the Organization of Economic Cooperation
and Development through the Multilateral Agreement on Investment
were aborted in the late 1990s, while developing country governments
nixed plans to hold investment discussions through the World Trade
Organization in 2003.
However, over the past 14 years U.S. trade
officials have managed to insert excessive investor protections
in trade agreements with 14 countries and in pending deals with
four additional nations (as of May 1, 2007). The only exception
is a 2004 U.S.-Australian deal. That country's negotiators refused
to accept investor-state dispute settlement. Worldwide, these
rules have proliferated through more than 2,500 bilateral investment
On April 29, 2007, the leaders of Bolivia,
Venezuela, and Nicaragua announced plans to withdraw from the
World Bank's arbitration court. Their joint declaration stated
that "(We) emphatically reject the legal, media and diplomatic
pressure of some multinationals that resist the sovereign rulings
of countries, making threats and initiating suits in international
This surprise announcement will not be
enough, legally, to release the three Latin American countries
from the interlocking web of rules and institutions designed to
shield foreign investors. Bilateral investment treaties signed
by Bolivia and Venezuela would still be in force, and getting
out of them could take years. Nicaragua would still be bound by
the investment rules of the Central American Free Trade Agreement.
And ICSID is the dominant but not the only enforcement option.
Foreign investors could instead demand that their cases be heard
under similar United Nations arbitration rules.
Nevertheless, this announcement was tremendously
significant on a political level and may empower other countries
to challenge these excessive investor protections. Argentina and
Ecuador are likely allies. Argentine Minister of Justice Horacio
Rosatti has said, "ICSID does not have authority over the
economic measures taken by a country during a crisis." Ecuadorian
President Rafael Correa has vowed to fight the Occidental Petroleum
suit, stating that "Ecuador has not accepted and will not
accept arbitration in ICSID or any other body."
Replacing the current international investment
rules with more just and equitable ones will require cooperation
between North and South. In the United States, Democratic congressional
leaders are considering new approaches to trade policy but have
yet to call for an end to investor-state powers. They should begin
a dialogue with governments that have been hardest hit by these
excessive investor protections and learn from their experiences.
Together, they could craft new rules that would allow governments
to ensure that foreign investment supports the public interest
- rather than being ruled by the corporate bottom line. Foreign
investors have had their fun. It's time to get them to act like
responsible global citizens.
World Trade Organization (WTO)