Transcript Document

ECONOMIC
INTEGRATION &
PROTECTION
STRATEGIES
Prof David K. Linnan
USC LAW # 783
Unit 13
OLD & NEW FORMS
PROTECTION OF ALIEN ECONOMIC
INTERESTS: CUSTOMARY VS NEWER
TREATY LAW
1. Traditional protection of aliens vs.
2. Newer bilateral (investment) treaty &
regional free trade agreements (e.g.,
NAFTA)
UNDERLYING ECONOMIC ISSUE IS DEGREE
OF DESIRED INTEGRATION, WITNESS
DIFFERENCES FOR EXAMPLE IN NAFTA
VS EU
ECONOMIC INTEGRATION I
GLOBALIZATION OR WHAT?
1. Economic integration plays a role in socalled globalization, but is more the
economist’s way of approaching the idea
that “states” as legal jurisdictions are not
natural or sole economic units and
have porous borders
2. Practical examples include burgeoning
regional trade agreements (NAFTA,
MERCOSUR, APEC, EU, etc.)
ECONOMIC INTEGRATION II
GLOBALIZATION OR WHAT? (CONT’D)
3. Different from the multilateral
trading system (GATT/WTO, but Art
XXIV recognition), but now going
beyond goods to services with
accompanying legal integration
4. Distinguishing different views/legal
approaches under trade & int’l
economic law as multilateral vs
something less
STATE RESPONSES I
ECONOMIC INTEGRATION AS A GIVEN
1. Subject to treaty obligation, states have
absolute right to close borders economically
a.
b.
c.
But who wants to be poor autarky
like North Korea?
Economic integration is a choice,
in practice for trade in goods, legal
result is linking trade & investment
In practice for trade in services,
less well understood (e.g., call centers
in India) but involves now GATS but
also merging regulation for services
STATE RESPONSES II
ECONOMIC INTEGRATION AS A GIVEN (CONT’D)
2.
The problem of economic integration is
visible legally in both investment and
FTA treaty explosion, but is clearer to
the clients than the lawyers who
specialize traditionally in the law of a
single jurisdiction
a.
b.
c.
Separate sovereigns &
borders visible as noncommercial risk
Different developing county
problem (NAFTA for first time
included developing &
industrialized states)?
Remaking global production
chains
US GOVT FOCUS
WHERE IS ECONOMIC INTEGRATION WORKED ON IN US
GOVT?
1.
US Trade Representative’s Office now in de facto
control of all int’l economic integration (aka treaty)
negotiations in US government, including
a.
GATT/WTO Doha Round Negotiations
b.
FTA negotiations as earlier NAFTA, more
recently US-Singapore FTA
c.
Int’l environmental & labor aspects of such
agmts
2.
“Subsidiary” departments/agency with seniority but
less voice due to negotiating functions being centered
in USTR include State, EPA, Commerce & Labor (but
Commerce has kept part of trade administration
machinery)
CHANGING LAW
HOW HAVE CHANGING ECONOMIC STRUCTURES & IDEAS LIKE
ECONOMIC INTEGRATION FOUND EXPRESSION IN LEGAL
STRUCTURES/VIEWS?
1.
Remember, traditional protection of alien economic interests
tied to customary law with inherent limits like nationality
limitations (e.g., Barcelona Traction in conjunction with
capital importing countries often requiring locally
incorporated subsidiaries) & dispute about appropriate
compensation following expropriation, Calvo clause
arguments, etc.
2.
The legal answer to ambiguous protection under the
customary law would normally be treaty, but then what kind
of treaty?
3.
Since mid-1980s BIT treaties pursued, but since 1990s free
trade agreements (FTAs) aka regional trade agreements
(RTAs) have been pursued alongside multilateral trade in
goods liberalization (GATT/WTO)
CHANGING ECON
HOW HAVE CHANGING ECONOMIC STRUCTURES & IDEAS LIKE
ECONOMIC INTEGRATION FOUND EXPRESSION IN LEGAL
STRUCTURES/VIEWS? (CONT’D)
4.
Trade economists analyze FTAs as second-best alternative
over multilateral trade liberalization (analysis based on
efficiency implications), but seem to downplay the
investment guaranty & service liberalization functions
5.
Private sector may prefer investment guaranty aspects, while
others may have a greater interest in service sector
liberalization anyway (given general develop of industrialized
nations’ economies towards services and away from goods
production; plus TNCs remaking global production chains)
6.
In practice, increasingly look towards not just treaties but
rather treaties with access and investment guaranty
elements tilted towards economic integration so that the
result is not just a tendency towards treaty for newer law but
also kind of treaty & form of economic integration (Singapore
issues in Doha round negotiations)
PRIVATE RISK ONLY?
WHO CARES ABOUT PRIVATE RISK OVERSEAS & WHY?
From private sector viewpoint, higher (moderate) risk is
acceptable but potential return must be higher
1.
Excessive risk leads to no investment, for example, in
the absence of which no economic
development/turmoil (remember two emphases in UN
Charter?)
2.
Portfolio versus direct investment differences most
recently with financial sector & capital account
deregulation
3.
Whose agenda drives such developments (private
sector vs anti-globalization folks)?
CAPITAL IMPORTING I
WHO CARES ABOUT NON-COMMERCIAL RISK &
WHY? (CONTD)
From viewpoint of states importing capital,
development models have moved away from
direct state borrowings to finance development to
attracting private capital
1.
Hidden ideological & economic policy
issue of role of state in development
2.
States and state enterprises (agents of
development), e.g., Indonesian Const
Art 33 representative of common
pattern in Asia/Africa
CAPITAL IMPORTING II
WHO CARES ABOUT NON-COMMERCIAL RISK & WHY?
(CONTD, CAPITAL IMPORTING COUNTRIES)
1. Non-market limitations on official development
assistance and subsidized lending by multilateral
institutions (World Bank, Asian Development Bank,
etc.), different world than 1980s
2. Conditionality (Washington Consensus,
incorporating economic views)
a.
Control arguments at multilateral level, payers
versus users in int’l financial institutions
b.
Voting control based on capital contributions
3. Arguments about social right (human rights issues) of
“right to development”
CAPITAL IMPORTING III
WHO CARES ABOUT NON-COMMERCIAL RISK &
WHY? (CONTD, CAPITAL IMPORTING
COUNTRIES)
1.
Market-based limitations on direct state
borrowings
a.
Overindebtedness, creditworthiness
problems raising the cost of capital
b.
Competitiveness problem for products
so funded
2.
Problem of financing intermediate
“infrastructure” that is harder to recover
direct costs on (e.g., education)
CAPITAL EXPORTING I
WHO CARES ABOUT NON-COMMERCIAL RISK & WHY?
(CAPITAL EXPORTING COUNTRIES)
1.
From viewpoint of states exporting capital, basic
issue of what is at risk if little or no economic
improvement/development in capital importing states
a.
Current claims re war on terror and lack of
development progress in Islamic world
b.
Absent viable economies, political unrest more
broadly (parallel 1945 UN Charter motivation
in seeing conflict & economic turmoil as linked)
2.
Via state sponsored political risk insurance
a.
Protection of private party citizens’ investment
involves capital-exporting state in nominally
private (investment) activity as guarantor
b.
When state must pay, follow up is as state
exercising retorsion, including IFI voting, etc.
CAPITAL EXPORTING II
WHAT IS SPECIAL RISK IN DEALING WITH NON-PRIVATE
ENTITIES?
1.
State-owned enterprises (SOEs) not only in
developing world and socialist countries, but
Europe too
a.
Theoretically, different economic views
b.
US has own problematic examples in mortage
market entities (Fannie Mae, Freddie Mac)
2.
Issue of framework of laws under control of business
party (legislative or regulatory problem) vs judiciary
favoring executive (home court advantage)
ex:
PLN example in Indonesia with arguments
about arbitration outside country for shelved
power projects (Karya Bodas)
CAPITAL EXPORTING III
WHAT ARE PRACTICAL STRATEGIES TO AMELIORATE/LIMIT
RISK?
1.
Traditional law of expropriation and nationalization
2.
Voluntary investment incentive programs, but what if
withdrawn?
3.
Insurance such as US OPIC, German Hermes,
Japanese Import-Export Bank, etc. programs to insure
against expropriation and convertibility risks,
Multilateral Investment Guaranty Agency (MIGA) of
World Bank, some private insurance
4.
Bilateral treaties (traditionally FCN, now investment
BITs, FTA/RTA examples such as NAFTA too)
essentially having capital importing states accept
capital exporting states’ views re traditional law of
expropriation
DIFFERING PERSPECTIVES
HOW DO DIFFERENT STATE GROUPS VIEW
EXPROPRIATION & NATIONALIZATION?
1.
Traditional sovereignty claims, now less
important often with move from primary
industries to manufacturing to services
(focus on HR as economic views change)
2.
Neocolonialism claims (control of resources
as control of economy in traditional primary
industries, NIEO revisited but fewer voices)
3.
Ideological issues if no or limited recognition
of private property (but heart of market
economy, but social functions argument on
spectrum from US inverse condemnation to
Indonesian Const art 33 arguments)
NON-COMMERCIAL RISK I
WHAT ARE NON-COMMERCIAL RISKS?
1. Expropriation without adequate
compensation
2. Violation by foreign governments of
concession or agreement
3. Foreign exchange restrictions &
interfering with profit repatriations
NON-COMMERCIAL RISK II
WHAT ARE NON-COMMERCIAL RISKS? (CONTD)
4.
Import restrictions (interfering with parts
supply)
5.
General regulatory issues (labor, property
use, etc.)
6.
Discrimination tax/retaliation
NON-COMMERCIAL RISKS TIED POSSIBLY TO
SOVEREIGN CHARACTER OF CERTAIN
ACTIONS, BUT ALSO SPECIAL FAVORITISM
PROBLEM WITH SOEs (ECONOMIC
ORGANIZATION ISSUE ELSEWHERE)
TRAD TREATY PATTERNS
ECONOMIC INTEREST PROTECTION & NON-COMMERCIAL
RISKS
1.
Tradition of Friendship, Commerce & Navigation or FCN
treaties (already common in 19th century)
2.
US Bilateral Investment Treaty Program (since 1980s,
under USTR control)
[Off the record]
3.
Relationship between trade & investment law (remaking
global production chains), regional trade arrangements or
RTAs of which NAFTA is one & NAFTA Chapter 11 its
embodiment
[Off the record]
[Off the record]
NAFTA PATTERN
ECONOMIC INTEREST PROTECTION & NON-COMMERCIAL
RISKS (CONT’D)
1.
NAFTA investment protection Chapter 11 not that far
off Restatement substantively, but clear rejection of
traditional Calvo challenges from Mexican standpoint
a.
b.
c.
d.
e.
non-discrimination
minimum standard of treatment in accordance with
international law
limitations on the use of “performance
requirements” (such as local content rules; really a
trade law element, not traditional alien protection)
freedom to repatriate profits and other returns
fair market value compensation for expropriated
property
WHERE NAFTA CLEARLY EXCEEDS TRADITIONAL ALIEN
PROTECTION LAW SUBSTANTIVELY IS IN RIGHT TO
INVEST (OPENING INDUSTRIES) [Off the record]
NAFTA FURTHER
ECONOMIC INTEREST PROTECTION & NON-COMMERCIAL
RISKS (CONT’D)
2.
Current NAFTA Chapter 11 issues
Claim is that “neutral” investment protection approach
of state to individual arbitration may undercut local law
making, particularly in environmental area, (idea of
replacing diplomatic protection with direct
proceedings as thorn in side, not substantive
standard)
a.
Methanex proceedings
b.
Broader issue in extent to which NAFTA is now
USTR gold standard for investment treaties
[Off the record]
[Opposing view]
[Do you agree?]
RISKS REVISITED I
LEGAL APPROACHES TO NON-COMMERCIAL RISK
1.
Expropriation without adequate
compensation
a.
Customary law alien economic
interests protection
b.
BIT or FTA treaties (e.g., NAFTA)
c.
Political insurance (quasigovernmental, e.g., OPIC)
2.
Violation by foreign governments of
concession or agreement
a.
Arbitration
b.
Political insurance
RISKS REVISITED II
LEGAL APPROACHES TO NON-COMMERCIAL RISK
(CONTD)
3.
Foreign exchange restrictions & interfering
with profit repatriations
a.
Normally only political insurance
4.
Import restrictions (interfering with parts
supply)
a.
Unless in contract, picked up perhaps
then in political insurance
b.
IFI conditionality, retorsion in effect on
Washington Consensus
c.
Chief recourse beyond investment
destination reputation
RISKS REVISITED III
LEGAL APPROACHES TO NON-COMMERCIAL RISK
(CONTD)
5.
General regulatory issues (labor, property
use, etc.)
a.
Short of expropriation, chief recourse
beyond investment destination
reputation
b.
IFI conditionality, retorsion in effect on
Washington Consensus
6.
Discriminatory tax/retaliation
a.
Customary law alien economic
interests
b.
BIT or FTA treaties quasi-national
treatment (e.g., NAFTA)
MODERN PRACTICE
ROLE OF FOREIGN STATES ACTIVELY PROTECTING
ECONOMIC INTERESTS
1.
How has traditional view of diplomatic protection
changed or stayed the same with the addition of
political risk insurance (e.g., OPIC) for economic
interests, beyond treaty & customary law?
2.
How does Barcelona Traction look in terms of
determining nationality for entities, and why do capital
importing & exporting states differ on this?
3.
What are the collateral effects of asserting such
protection strategies on state/private level?