APEC Workshop on Non-discrimination in Investment

UNCLAS SECTION 01 OF 03 GUANGZHOU 030120 SIPDIS SENSITIVE SIPDIS STATE FOR EAP/CM USDOC FOR 4420/ITA/MAC/MCQUEEN, CELICO, DAS LEVINE STATE PASS USTR STATE PASS FEDERAL RESERVE BOARD FOR SCHINDLER USPACOM FOR FPA E.O. 12958: N/A TAGS: ECON PGOV PREL CH SUBJECT: APEC Workshop on Non-discrimination in Investment Agreements, September 1-3 (U) THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED. PLEASE PROTECT ACCORDINGLY. NOT FOR RELEASE OUTSIDE U.S. GOVERNMENT CHANNELS. NOT FOR INTERNET PUBLICATION. ¶1. (U) Summary: Developing country representatives meeting at a September 1-3 APEC workshop in Xiamen on "Non- discrimination Treatment in Investment Agreements" expressed some concerns about new U.S. free-trade agreements in Southeast Asia. The nine APEC countries attending the meeting focused on three investment issues: most-favored nation status (MFN),national treatment in host countries and "fair and equitable treatment" clauses. Most of the workshop discussions focused on information sharing, with participants generally agreeing on the necessity of non- discrimination treatment. End summary. Outline of the Workshop -------------- ¶2. (U) The Asia Pacific Economic Cooperation (APEC) Workshop on "Non-discrimination Treatment in Investment Agreements was sponsored by the Chinese Ministry of Commerce (MOFCOM). In addition to the nine participating countries, experts from the United Nations Conference on Trade and Development (UNCTAD) also attended. The term non- discrimination was used in workshop to refer to laws created to ensure a legal "level playing field" for investment in foreign countries. MFN --- ¶3. (U) According to UNCTAD Consultant Roberto Enchandi, MFN is "a standard that entitles investment or investors of a Contracting Party to a treatment by other Contracting Parties which is no less favorable than the treatment the latter grants to investments or investors of any other third State." Therefore, MFN is the highest level of investment protection and is a core clause in international investment agreements (IIAs),though the scope can vary significantly among different IIAs. For example, MFN can be granted negatively (top-down) or positively (bottom-up). The negative approach means that MFN is granted in all situations unless there are exceptions or reservations. In the positive approach, MFN is granted only if a specific individual commitment is made. ¶4. (U) Enchandi also distinguished between pre- and post- establishment investment phases of MFN. Pre-establishment referred to market access provided an "investor", while post- establishment connoted the treatment an "investment" received after entering the country. Currently only the United States and Canada have pushed for the more liberal pre-establishment phase MFN. Even if MFN were granted in the post-establishment phase, many exceptions and reservations could be made on a general (public order or national security),subject-specific (taxation and intellectual property rights) or county-specific basis. ¶5. (U) Conference participants agreed that countries needed to clarify their policy towards MFN prior to entering negotiations. Additionally, many participants complained that the MFN clause could be widely interpreted and the vagueness of the term necessitated the addition by drafters of more annexes to ensure clarity of meaning. ¶6. (U) One example of vagueness in MFN clauses was the use of the term "like circumstances". Essentially the term means that an agreement between country "A" and "B" should also apply to country "C", if country "A" and "C" have an agreement of "like circumstances". Thus, a country cannot borrow from human rights treaty and attach it to an investment treaty. The Drawbacks of FTAs -------------- ¶7. (U) Ms. Deunden Nikomborirak, an academic from the Thailand Development Research Institute, warned that free trade agreements (FTA),which are currently popular in Southeast Asia, could be detrimental to developing GUANGZHOU 00030120 002 OF 003 countries. For example, if a developing country has a national policy protecting telecommunication services and suddenly signs an FTA with a developed country that would open all service sectors, the developing country would be handing over a "monopoly" opportunity to the developed country. ¶8. (SBU) Moreover, she warned that the fierce struggle among the major economies in ASEAN (Singapore, Malaysia and Thailand) to become Southeast Asia's economic "hub" would end up to the detriment of the region, and for the benefit of the United States. All three of the ASEAN economies above currently have or are aggressively pursuing FTAs with the United States. Nikomborirak predicted that MNCs based in the U.S. or with U.S. branches would simply increase their investments in the U.S.-based branches, where investment access was easy and transparent; they could gain better access to ASEAN markets through the United States. In essence, the United States would be the real hub for the region, with ASEAN nations as the spokes. Dispute Settlement -------------- ¶9. (U) As for dispute settlement of investment conflicts, one participant said "this could be a whole workshop by itself." In other words, how does one apply MFN in dispute settlement? In some cases, such as Maffezini vs. Spain and Siemens vs. Argentina, international tribunals have ruled in favor of MFN applicability in a dispute settlement. In other cases, such as Salini vs. Jordan, a bilateral investment treaty (BIT) referred explicitly to investors going through domestic courts to resolve disputes. UNCTAD's Enchandi said that the use of dispute settlement depends greatly on the wording of the MFN clause. More importantly, as one participant said, "it doesn't matter what you put in the treaty, it matters what the tribunal thought you put in the treaty." National Treatment -------------- ¶10. (U) As for national treatment, Anthony Hinton from the Australian Treasury Ministry noted that a host country is obliged to extend to foreign investors treatment that is at least as favorable as the treatment that it accords to national investors in like circumstances." Like MFN, national treatment contains exceptions and reservations, especially relating to national security, health and public order. IIAs differ in particular whether the national treatment principle extends to the pre-establishment phase. ¶11. (U) UNCTAD's Enchandi emphasized the importance of treaty annexes in the interpretation of national treatment. Enchandi noted that the U.S.-Singapore FTA specifically explained the national laws on which it was based and thus favored U.S. companies. However the U.S.-Chile FTA simply referred to Chile's interpretation of national treatment. "Fair and Equitable Treatment" -------------- ¶12. (U) Joachim Karl from UNCTAD said that an important part of fair and equitable treatment is the adherence to an international minimum standard, i.e., that there are certain international basic standards that must be ensured in all international agreements (something akin to the UN Declaration on Human Rights, but for investment). Karl listed four core principles that might define the international minimum standard: -- transparency and the protection of investor's legitimate expectations; -- freedom from coercion and harassment; -- procedural propriety and due process; and -- good faith. According to Karl, because the notion of fair and equitable treatment is so controversial, it is likely that more BITs will include detailed explanations of its meaning, as in the U.S.-Uruguay BIT. Developing Country Concerns GUANGZHOU 00030120 003 OF 003 -------------- ¶13. (U) This final session of the conference provided the liveliest response from participants. Many of the developing country representatives (Malaysia, Thailand and China),raised objections to the definition of fair and equitable treatment and the use of "customary international law". Lu Tao, the Chinese representative from the Ministry of Commerce, said that fair and equitable treatment is a very broad term that could include accusing the justice system of an entire country to be unfair. The Chinese and other countries are cautious using this term. Furthermore, Lu said that customary international law is "only practiced by 10-20 countries in the world, most of which are capital exporting countries;" these countries have an interest in working to improve investment climates. Developing countries "were never involved with making these laws, yet are now bound by such laws." Lu also said he had read many articles by American law professors who had actually argued against the notion of customary international law. ¶14. (U) UNCTAD's Enchandi, however, responded that "customary international law" actually provided better protection for developing countries because countries can drawn from the entire legal corpus of international investment agreements. Case Study: China's Investment Strategy -------------- ¶15. (U) In its presentation about its investment policy, the Chinese representative noted that China does not have a reciprocal promotion and protection of investment agreement (RPPIA, essentially the Chinese BIT) with any North American country. China's first generation of RPPIAs was negotiated between 1982 and 1997. From 1997 onward, the Chinese have begun negotiating new agreements with updated mechanisms, such as national treatment and some dispute settlement mechanisms. China has reservations about a number of issues including, pre-establishment phase investment protection, minimum standard of treatment in accordance with customary international law, transparency, performance requirement, intellectual property rights (IPR),environment, competition policy and labor standards. Specifically, on IPR, the representative said that IPR "does not directly relate to investment" and China would seek a specific treaty on the issue. ¶16. (U) The Australian representative asked why the Chinese government was "so uncomfortable" with pre-establishment phase investment? Lu Tao replied that China's lack of international dispute experience for China accounted for its hesitancy. Moreover, the Chinese prefer working through the WTO, which only deals with government-to-government issues rather than international tribunals, where any investor or investment could raise a claim. Comment -------------- ¶17. (SBU) Since the workshop focused on the background and basic issues of non-discrimination, the bulk of the discussion was on legal definitions and IIA process. Only towards the end of each session did the comments become more focused and heated, most noticeably on the issue of "international customary law," about which we expect to hear more in the future. Goldberg