Jonathan C. Hamilton and Charles B. Rosenberg, “The Intersection of Investment and Trade,” Global Arbitration Review (2014)

The intersection of trade and investment protections indicates that trade benefits may be in play as a tool to achieve policy objectives.  That could further affect investment, trade, and international relations between impacted countries - and for international dispute systems involving Latin American states.  These developments might have concrete ramifications for Argentine and Ecuadorean exporters, as well as US importers, and be a warning signal to other states.  These developments also may portend enhanced focus on the increasingly interdisciplinary nature of investment disputes in today’s multipolar world.  The worlds of investment and trade appear set, at last, to become further intertwined in new ways since the changes that swept Latin America over two decades ago.

International dispute systems adopted two decades ago have emerged over time as central components of legal, political, and economic development in Latin America.  Two distinct systems - international trade and investment protections - have proven to be increasingly interrelated.  The intersection of trade and investment recently has been marked by the relationship between trade benefits and compliance with investment arbitration awards. 

Specifically, in the past two years, the US government has used its trade preference programmes as leverage to encourage Argentina and Ecuador to comply with investment treaty arbitration awards in favor of US corporations.  This development is unprecedented and has ramifications for exporters and importers, investors and states, and impacted citizens.

Investment and Trade in Latin America

Latin American states adopted watershed changes two decades ago in the 1990s.  Most countries adopted sweeping changes in their legal, political, and economic frameworks and changed the relationships between states and other states, investors, and citizens.  Those changes formed the foundation for stability in some countries, and fomented subsequent and sometimes reactionary shifts in other countries.

Central to those watershed changes were the advent of new international dispute resolution systems that have had a significant impact on the course of development and the rule of law in Latin America and beyond.  One of those systems was trade-oriented and the other investment-oriented.  Both reflected a trend towards the globalization of economies and legal protections.

As to trade, Latin American states began to ratify free trade agreements (FTAs) such as NAFTA, which entered into force in 1994.  They also joined the World Trade Organization (WTO) established in 1995, and its state-to-state dispute system centered in Geneva.  Some of the first trade cases at the WTO were brought against Latin American states.  Several states in Latin America have become repeat players at the WTO as both complainants and respondents, including Argentina, Brazil, Chile, and Mexico.  Latin American states have since been parties to approximately 45 percent of the total 479 cases registered before the WTO, according to WTO data.

As to investment, Latin American states began to ratify bilateral investment treaties (BITs), as well as FTAs with investment chapters.  Most of them also ratified the convention providing for investment arbitration before the World Bank’s International Centre for Settlement of Investment Disputes (ICSID), and its investor-state dispute system centered in Washington, DC.  The first ICSID case against a Latin American state was filed in 1995, whereas the first ICSID case by a Latin American state as claimant was registered (and resolved) in 2013.  Latin American states have now been parties to approximately 35 percent of the total 474 cases registered before ICSID since its founding in 1966, according to World Bank data, with the largest numbers of cases filed against Argentina and Venezuela.  The ICSID system has also been marked by the efforts of Bolivia, Ecuador, and Venezuela to withdraw from systems they previously adopted….

The investment and trade systems share related overarching goals, primarily the efficient allocation of resources through international economic activity in furtherance of global growth. They also have distinct but similarly aimed dispute resolution systems. has. not In spite of this, these two systems have historically remained surprisingly independent from each other.  However, today this separation is eroding as the two systems become increasingly, and sometimes unexpectedly, intertwined. In the WTO system, for instance, a current case between Guatemala and Peru is testing the relationship between bilateral provisions of a contemporary bilateral trade and investment agreement and the global trade system. Moreover, the interconnectedness of the international trade and investment regimes has provoked new flashpoints in the relationship between trade benefits and compliance with investment arbitration awards, as shown by cases involving Argentina and Ecuador.

Argentina

Argentina’s settlements of certain investment disputes with US investors are illustrative of how foreign investment disputes increasingly are becoming part and parcel of bilateral political and economic relations between states.  According to reports, Argentina agreed as of October 2013 to pay five investment treaty awards in favour of US creditors – issued in the Azurix, CMS Gas, Continental Casualty, National Grid, and Vivendi cases – through more than US$500 million in government bonds.  After Argentina was pressured by US creditors for more than five years in some of the cases, reports indicated that the awards were paid to avoid a potential US veto of a US$1.8 billion credit line from the World Bank and the International Monetary Fund (IMF). Moreover, Argentina’s preferential trade benefits recently had been suspended by the US as a result of the non-payment of two of these awards.

In May 2012, the US suspended Argentina’s trade benefits under the Generalized System of Preferences (GSP).  The suspension was based on the petitions of two US corporations, who alleged that Argentina has failed to comply with the ICSID awards in Azurix and CMS Gas, worth a combined US$300 million.  After a two-year administrative process that invited comments from a variety of parties, including the Argentine government, Argentine exporters, and US importers, the US granted the request and suspended Argentina’s GSP benefits. 

The US GSP is a trade preference programme designed to “promote economic growth in the developing world” by providing preferential duty-free entry for up to 5,000 products when imported from one of 127 designated beneficiary countries.  The US GSP statute provides:

The President shall not designate any country a beneficiary developing country ... if [s]uch country fails to act in good faith in recognizing as binding or in enforcing arbitral awards in favor of United States citizens or a corporation ... which is 50 percent or more beneficially owned by United States citizens....

The suspension of Argentina’s preferential trade benefits was unprecedented:  it was the first time in the history of the US GSP that a country’s preferential trade benefits have been suspended due to an alleged failure to comply with an arbitral award. 

Importing Argentine goods into the United States is now more costly.  Miami-based importer Rudy’s Candies and Confections explained in the administrative proceeding that the removal of Argentina from the GSP would “limit the number of sources and increase costs” and penalise US consumers “with higher prices and a limited selection of high-quality confections.”

In the competitive US market where margins are often slim, more expensive products might lead US importers to turn to Argentina’s GSP-eligible neighbours, such as Bolivia, Brazil, Paraguay, and Uruguay, to substitute cheaper goods.  Those most affected by the suspension are the cheese, strawberry, sugar confection, wine, leather, and lithium industries.

Moreover the Argentine government claimed in the administrative proceeding that suspending its trade benefits would negatively affect employment and economic development in Argentina because “[d]uty-free access under the GSP creates for a large number of Argentine firms, especially small and medium-size businesses, a leveled playing field enabling them to compete in the U.S. market.”  Fundición San Cayetano, an Argentine exporter of cylinders for rolling mills, illustrated this concern: 

The additional cost of importing, without the GSP tariff preference, ... from Argentina would place our company at [a] ... competitive disadvantage.  Most of our major competitors in the US market are domestic companies and foreign ones which have duty-free benefits.  The removal of GSP benefits would result in additional costs to our company not borne by our main competitors.

These negative effects are compounded, some observe, by the fact that Argentina stopped receiving trade benefits under the EU GSP at the end of 2013 as a result of Europe’s recent revamping of its GSP to focus on those “countries most in need.”

Ecuador

The Andean Trade Preference Act (ATPA) has been a key vehicle for facilitating trade between the US and some Latin American states.  Following Argentina’s suspension from the GSP, one US think tank advocated for the US to also strip Ecuador of its trade benefits under the ATPA. Citing Ecuador’s withdrawal from the ICSID Convention and the attempts at enforcing the US$19 billion Lago Agriojudgment against Chevron, the Heritage Foundation argued that Ecuador has “acted with contempt for the arbitral process” and that, based on the Argentina precedent, “similarly strong action should now be taken against Ecuador.”

Shortly thereafter, Chevron asked for just that:  withdrawal of Ecuador’s ATPA benefits due to Ecuador’s alleged failure to comply with the interim awards issued by the arbitral tribunal in Chevron v Ecuador.  Chevron maintained that Ecuador has ignored the interim awards by failing to take all measures necessary to suspend the Lago Agrio judgment.  Actions to enforce the judgment have been brought in Brazil, Canada, and the US.

The ATPA is a US trade preference programme that was enacted in the early 1990s to help Bolivia, Colombia, Ecuador, and Peru fight drug production and trafficking by expanding their economic alternatives.  The ATPA, like the US GSP, makes compliance with international arbitral awards a condition of eligibility.  The Ecuadorean petroleum sector has been by far the primary beneficiary under the ATPA, but the flower and groceries sectors also are large recipients of the preferential import tariffs.  As the conduct of the relevant states has diverged including as to investment and trade policies, new international issues have emerged.

Chevron’s petition to revoke Ecuador’s ATPA benefits was supported by five other parties, including the National Association of Manufacturers, the US Chamber of Commerce, the US Council for International Business, and the Emergency Committee for American Trade.  On the other side, however, there were around 100 comments in opposition, including by the Miami Chamber of Commerce, the Port of Los Angeles, the Illinois Hispanic Chamber of Commerce, U.S. importers of cut flowers, and Ecuadorian exporters of groceries and seafood.

Ecuador’s embassy in the US opposed Chevron’s petition on the basis that “the United States and Ecuador should not permit bilateral relations to be damaged, or political decisions influenced, on account of a private litigant’s efforts to use the political process to affect the judicial processes.”  The embassy stressed that the US government “should not use trade policy as leverage to interfere in private claims processing through Ecuador’s legal process, or in any other forum worldwide.”

This view was shared by Transformative, a San Francisco-based investment and consulting firm involved in the water, transportation and renewal energy sectors, who encouraged “the U.S. Congress and the Administration to resist permitting extractive industries to hold hostage an entire trade preference program when innovative alternatives exist that will expand trade for all industries, including the extractive industries.”

In any event, Chevron’s ATPA petition ultimately became moot.  In an unusual turn of events, Ecuador voluntarily renounced its ATPA benefits in June 2013 as a result of the US government allegedly pressuring Ecuador to reject the asylum application of Edward Snowden, the US National Security Agency whistleblower.  The following month, the US Congress simply allowed ATPA to expire on its own terms.

Although no longer an ATPA beneficiary, Ecuador still receives duty-free treatment for many of its goods under the US GSP (and, unlike Argentina, the EU GSP).  However, the US government accepted a petition by Chevron in 2012 to suspend Ecuador’s eligibility under the US GSP. Chevron maintained in its petition that Ecuador has acted in bad faith in recognising international arbitral awards as binding or in enforcing them, by:  initiating legislative action to formally withdraw from the US-Ecuador BIT; refusing to recognise the interim awards in Chevron v Ecuador as binding; aggressively attacking the legitimacy of the BIT and the entire arbitral process; and embarking on a diplomatic mission to rally other states to join Ecuador in denouncing the tribunal’s award and the BIT process.

The US company recounted that just days after his re-election, President Rafael Correa of Ecuador emphasised his disdain for international arbitration tribunals, calling them “pimps” that are “there to defend the interests of investors, the capital of foreign companies.”  Chevron also quoted President Correa’s three-hour “Enlace Ciudadano” speech, in which he stated:

We urgently need Latin American unity to avoid the abuses of the multinational corporations that consider us colonies and have on their pay-list the arbitrators and arbitration centres ... We are still suffering the lethal inheritance of the long, dark neoliberal night with these criminal investment treaties ... It’s the end of sovereignty, the end of our independence; we have become colonies with these rulings from international courts.

In response to Chevron’s petition, the Ecuadorean embassy in the US expressed its disappointment “that Chevron is seeking to hold thousands of jobs in Ecuador and the United States hostage to its dispute by mounting a false and misleading effort to demand the suspension of trade benefits with Ecuador.”  The embassy also maintained that the Ecuadorean government’s intervention in the Lago Agrio dispute, which involves private parties, “would violate Ecuador’s Constitution and a fundamental principle of the independence of Ecuador’s branches of government.”

The US government is currently conducting an administrative review.

An Intersection Arising Out of Policy Aims

The intersection of trade and investment protections indicates that trade benefits may be in play as a tool to achieve policy objectives.  That could further affect investment, trade, and international relations between impacted countries - and for international dispute systems involving Latin American states.  These developments might have concrete ramifications for Argentine and Ecuadorean exporters, as well as US importers, and be a warning signal to other states.  These developments also may portend enhanced focus on the increasingly interdisciplinary nature of investment disputes in today’s multipolar world.  The worlds of investment and trade appear set, at last, to become further intertwined in new ways since the changes that swept Latin America two decades ago.

The intersection of trade and development has been marked by the relationship between trade benefits and compliance with investment arbitration awards.