Proposed Trade Act of 2009 May Lead to Change in Arbitration Provisions in CAFTA and Other Trade Agreements

Congressman Michael Michaud (D-ME) and 106 other members of Congress recently introduced the TRADE (Trade Reform, Accountability, Development, and Employment) Act of 2009, which calls for a reevaluation of international trade agreements.  The bill would in part require existing and future trade agreements to include a ban on investor-state dispute settlement mechanisms, providing for state-to-state dispute resolution instead. Currently, Chapter 10 Section B of CAFTA-DR permits investors to sue a government if their investment has been undermined in a manner that amounts to expropriation, or violation of the national treatment or the most-favored-nation treatment standards outlined in Section A of Chapter 10.

Currently, Pacific Rim Mining Corporation is pursuing arbitration over its mining investment in Cabanas, claiming that the Salvadoran government violated its rights under Chapter 10 of CAFTA, Section A when they denied the mining company exploitation permits. Prior to CAFTA-DR, Pacific Rim would have had to take its complaint to their own government, and asked them to seek arbitration on their behalf – state to state. In fact, state-to-state dispute resolution remains a principle of international law, and only signatories to CAFTA, NAFTA and other trade agreements are subject to a claim by a non-state actor.

Provisions such as those found in Chapter 10 of CAFTA and other agreements give non-state investors unprecedented rights and influence over the domestic affairs in a foreign country.  For centuries, international and domestic law has embraced the principal that foreign affairs are best handled by states, and in the case of the U.S. the executive branch. Giving non-state investors the right to sue a sovereign state not only undermines a government’s ability to care for the needs of its people, but can also undermine the foreign policy and national interests of the investors’ native country.

Civil society organizations in the U.S. and Latin America have expressed their support for the bill, joining the Obama Administration, the U.S. State Department Subcommittee on Investment, and others who believe that non-state investors should not have the right to sue a foreign government.  President Obama has stated in the past, “with regards to provisions in several [Free Trade Agreements] that give foreign investors the right to sue governments directly in foreign tribunals [he would] ensure that foreign investor rights are strictly limited.”  The State Department Subcommittee on Investment of the Advisory Committee on International Economic Policy Regarding the Model Bilateral Investment Treaty recommends the change to state-to-state dispute resolution mechanisms proposed in the TRADE Act, because it would require investors to first exhaust domestic remedies and allow governments to prevent frivolous or harmful claims.

The need to protect foreign investors from expropriation and enforce national treatment and most-favored-nation standards are very legitimate. However, even under the state-to-state dispute resolution system, Pacific Rim would still be able to seek restitution, but they would have to first convince either the Canadian or U.S. government (they have registered corporations in both countries) to negotiate a settlement or seek arbitration on their behalf.  If their claim was legitimate, either government should have been more than willing to advocate on their behalf.  As it is, Pacific Rim has successfully divided the country of El Salvador, and caused the government to invest valuable resources into defending itself against lawsuit that will likely turn out to have little merit.

If passed, Congressman Michaud’s TRADE Act of 2009 would be the first step in restoring balance and order to the international community and prevent the interests of a few corporations to trump those of sovereign nations.

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