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The First Bilateral Investment TreatiesU.S. Postwar Friendship, Commerce, and Navigation Treaties$

Kenneth J. Vandevelde

Print publication date: 2017

Print ISBN-13: 9780190679576

Published to Oxford Scholarship Online: April 2017

DOI: 10.1093/acprof:oso/9780190679576.001.0001

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Epilogue

Epilogue

Chapter:
(p.537) Epilogue
Source:
The First Bilateral Investment Treaties
Author(s):

Kenneth J. Vandevelde

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780190679576.003.0010

Abstract and Keywords

In 1966, as the last FCN treaty awaited signature, the Senate sought to strengthen the rule of law with respect to investment by giving advice and consent to ratification of the ICSID Convention, which provided a forum for arbitration of disputes between investors and host states. The Convention was particularly supported by liberal Democrats who were heirs to the liberal internationalist tradition of the New Deal. Meanwhile, in 1959, Germany had inaugurated a series of bilateral investment treaties (BITs) that consisted largely of counterparts to the investment-related provisions of the U.S. postwar FCN treaties. After several other European countries emulated Germany’s example, the Carter administration launched a U.S. BIT program, ending the 200-year-old FCN treaty program. The U.S. BITs included successors to the investment-related provisions of the U.S. postwar FCN treaties and a few innovations from European BIT practice, most notably a provision for investor-state arbitration before ICSID.

Keywords:   ICSID Convention, liberal internationalism, German BITs, Carter administration, U.S. BIT program, rule of law, investor-state arbitration

In May of 1966, as the last FCN treaty ever to be concluded by the United States awaited signature, the U.S. Senate took action that it hoped would strengthen the rule of law with respect to foreign investment. Specifically, it gave advice and consent to ratification of the Convention on the Settlement of Investments Disputes between States and Nationals of Other States, generally known as the ICSID Convention.1 The ICSID Convention created an International Centre for Settlement of Investment Disputes (ICSID), an affiliate of the World Bank,2 that provided rules and a facility for the arbitration of investment disputes between investors and host states.

The ICSID Convention addressed the problem that no mutually acceptable forum existed for the resolution of disputes between foreign investors and host states.3 Investors were unwilling to submit disputes to local courts.4 The International Chamber of Commerce (ICC) long had urged that host states consent to the arbitration of investment disputes with investors before existing arbitral organizations, such as the ICC,5 but host countries had been unwilling to submit their disputes to private arbitral bodies.6 The ICC, in the alternative, (p.538) had proposed as early as 1947 the creation of a standing Court of Arbitration7 or the modification of the Permanent Court of Arbitration to provide a facility for investor-state arbitration.8 Although the U.S. postwar FCN treaties had provided for submission by the parties of investment disputes arising under the treaties to the International Court of Justice, the United States had anticipated that resort to the Court for that purpose would be rare and, in fact, as of the mid-1960s no investment dispute arising under a U.S. postwar FCN treaty had ever been submitted to the Court, confirming that the Court would be all but unavailable as a practical matter. By filling the need for a readily available procedure to resolve investment disputes, the State Department believed, the Convention would assist private investors, stimulate the flow of private investment to developing countries in need of it, and benefit foreign relations by having disputes settled directly by the investor and government involved.9

Two witnesses appeared before the Committee on Foreign Relations in support of the ICSID Convention, Undersecretary of the Treasury Joseph W. Barr and State Department Legal Adviser Leonard C. Meeker. Meeker presented a written statement in which he said that “[a]‌ mechanism for impartial resolution of disputes between investors and host governments is a meaningful step toward assuring fair treatment for investor and host country alike.”10 He noted that the ICSID Convention did not provide any substantive rules regarding investment protection, but it was “anticipated that decisions through the convention’s mechanism will create a significant new body of international law. Thus, international law in this area can be expected to grow as the result of this convention.”11

Meeker explained the benefit to the United States of this development: “As the country with the greatest amount of international investment, and the greatest stake in the development and wide acceptance of international law standards regarding the protection of private property, the United States stands to gain substantially from acceptance of the convention and use of its facilities.”12 In the conclusion to his remarks, Meeker again returned to the theme that the creation of ICSID could make “a significant contribution … to the development of international law.”13

(p.539) The Convention was well received. Following the testimony by Barr and Meeker, Democratic senator J. William Fulbright of Arkansas, the chairman of the Committee, observed, “I personally think it is a very good idea, and I am very strong for it.”14 On the Senate floor, just prior to the vote on the Convention, Democratic senator Wayne Morse of Oregon would assure the Senate that the Convention enjoyed the “enthusiastic support” of the Committee.15

Members of the Senate were particularly attracted by the role of ICSID in developing international law. Senator Morse observed during the hearings, “I will heartily support the objectives of this convention because I think this is a step in the direction really of building up the common law of international law, which is so sorely needed in the whole field of international law. We do not have enough precedents of an international common law, and arbitration awards are part and parcel of a system of international law… .”16 The Committee’s report on the Convention noted that the Convention was designed to stimulate the flow of international investment to less developed countries, which the Committee described as a “commendable objective.”17 The report noted that, “[i]‌n addition, it is reasonable to expect that a substantial body of new international law will be developed as a result of this convention. This, also, is a step in the right direction.”18 On the Senate floor, Democratic senator Vance Hartke of Indiana argued that the ICSID Convention would “lift the curtain of uncertainty” concerning the framework governing foreign investment.19 Senator Hartke placed into the record a recent speech by Undersecretary Barr in which he had observed that “as the convention operates over a period of time, we can look forward to the emergence of a new body of case law to guide nations in both avoiding and settling investment disputes.”20

Further, ICSID “may also serve to move investment disputes from the political to the legal arena.”21 Barr believed that “at a time of considerable sensitivity between the developed and the developing nations” this could “only be regarded as an important step forward.”22

When the Convention came before the Senate for a vote on May 16, Senator Morse took the floor again to emphasize the contribution of the Convention to building international law. He explained that the Convention was “another opportunity for us to add further foundation stones to the erection of an international organization with (p.540) procedure for the settlement of disputes by the substitution of the rule of law. We all know that there is a great need in this country for the building of the precedents of international law.”23

Moments later, the Senate gave advice and consent to the ratification of the Convention by a vote of 72-0.24 Although support for the ICSID Convention was unanimous, the three senators who spoke in support of it—Senators Fulbright, Morse, and Hartke—were all Democrats whose foreign policy in the 1960s was defined by their opposition to the Vietnam War. Senator Morse, for example, had been one of only two senators who had voted in 1964 against the Gulf of Tonkin Resolution, which the Johnson administration treated as congressional authorization for the war. The very same month in which the Senate approved the ICSID Convention, Senator Fulbright delivered at Johns Hopkins University a lecture called “The Arrogance of Power,” in which he criticized U.S. military intervention in Vietnam. The following year, Senator Fulbright expanded the lecture and published it in book form.25 A year later, Senator Hartke published his book, The American Crisis in Vietnam,26 in which he too condemned the war. In short, the ICSID Convention was most strongly endorsed by liberal Democrats who supported the promotion of the rule of law in international relations, that is, by those senators who were liberal internationalists in the tradition of Franklin Roosevelt’s New Deal.

By 1977, when Democrat Jimmy Carter was inaugurated as president, some 15 years had passed since the initiation of a successful FCN treaty negotiation. Meanwhile, in 1959, Germany had concluded a treaty with Pakistan concerned solely with the protection of foreign investment.27 Pakistan signed its bilateral investment treaty with Germany less than two weeks after it had signed its FCN treaty with the United States.

This first German BIT, with Pakistan, consisted largely of counterparts to the investment-related provisions in the U.S. postwar FCN treaties. Like the U.S. FCN treaties, the Germany-Pakistan BIT guaranteed both national and MFN treatment (though not with respect to the establishment of investment),28 contained general prohibitions on discriminatory treatment,29 guaranteed protection and security for investment30 (which would become “full” protection and security (p.541) by 1961),31 required compensation for expropriation32 and guaranteed free transfer of capital and returns, with no balance of payments exception.33 Disputes under the Germany-Pakistan BIT would be submitted to arbitration or, if both parties agreed, to the International Court of Justice.34 By 1961, Germany would add the fair and equitable treatment standard to its BITs.35 The BIT between Germany and Pakistan would also commit the parties, within one year after signing the treaty, to enter into negotiations to conclude an establishment treaty that would make provision for, among other things, entry and sojourn, engaging in business and professional activities, employment of managerial and technical staff, and access to courts.36 Although the German treaties also drew from the Draft Convention on Investments Abroad authored by Hermann Abs and Lord Hartley Shawcross,37 the authors of that Draft Convention explained that all but one of the substantive provisions in their Convention were derived from the U.S. postwar FCN treaties.38

Other European countries soon followed Germany’s example. For example, between 1959 and 1966, the year that the United States concluded its last FCN treaty, Germany, France, Switzerland, the Netherlands, Italy, the Belgium-Luxembourg Economic Union, Sweden, Denmark, and Norway all inaugurated new BIT programs. By the late 1970s, more than 170 BITs had been concluded among some 65 countries.39

(p.542) The content of the other European BITs, like those of Germany, included counterparts to all but a few of the investment-related provisions of the U.S. postwar FCN treaties. These European BITs typically required MFN (and often national) treatment of investment, fair and equitable treatment, most constant protection and security, just compensation for expropriation, free transfer of capital and returns, and binding, third-party dispute settlement, and they prohibited unreasonable or discriminatory measures.40 The European BITs also included a few provisions without precedent in the U.S. FCN treaties, including a provision requiring each party to observe any obligation into which it had entered with respect to investment, a provision addressing compensation for losses caused by war or civil disturbance, and, beginning in 1969, a provision for submission of disputes between investors and host states to arbitration before ICSID.

By the 1970s, the U.S. business community was well aware of the contrast between the successful European BIT programs and the moribund U.S. FCN treaty program. Groups such as the International Chamber of Commerce and the State Department’s Advisory Committee on Transnational Enterprises recommended the initiation of a U.S. BIT program and began to pressure the State Department to emulate the European example. Members of Congress, such as Democratic senators Frank Church of Idaho (who would serve as chairman of the Committee on Foreign Relations from 1979 to 1981) and Claiborne Pell of Rhode Island (who would serve as chairman of the Committee on Foreign Relations from 1987 to 1995), similarly urged the negotiation of additional treaties to protect foreign investment. As in the case of Senate approval of the ICSID Convention, the most vocal support within the Senate for the inauguration of the BIT program came from liberal Democrats who had been early opponents of the Vietnam War and who were heirs to the liberal internationalism of the New Deal.41

On March 7, 1977, the State Department’s legal adviser, along with the assistant secretary of state for economic affairs, jointly proposed the inauguration of a new series of U.S. BITs that would serve as the successors to the FCN treaties. The U.S. BITs, like the European BITs, would consist largely of provisions based on the investment-related ones of the U.S. postwar FCN treaties. They included successors to all of the investment-related provisions discussed in Chapter 8—provisions on national and MFN treatment, fair and equitable treatment, most constant protection and security, treatment in accordance with international law, unreasonable and discriminatory measures, just compensation for expropriation, (p.543) free transfer of investment and returns, entry and sojourn, employment of key personnel, judicial access, competitive equality, transparency, consultations, and binding, third-party settlement of disputes involving the interpretation or application of the treaty as well as exceptions for security-related measures. Thus, the treaty provisions that had implemented the foreign investment policy of the Roosevelt and Truman administrations were once again incorporated into a series of U.S. investment treaties by another Democratic administration, although by the 1970s this treaty series comprised the BITs rather than the FCN treaties.

The new U.S. BITs did include some innovations in U.S. investment treaty practice. The most important such innovation was the provision, pioneered in the European BITs, that included each party’s consent to arbitration before ICSID of investment disputes with investors. This provision offered investors a much more effective means of enforcing treaty commitments than had been available under the U.S. FCN treaties. At the same time, it served the same function as the compromissory clauses of the FCN treaties in promoting the rule of law by shifting disputes from the political arena to a legal proceeding and by developing a body of precedent that elaborated the content of international investment law.

The new U.S. BITs also contained a new substantive provision taken from the European BITs, the provision requiring each party to observe any obligation into which it had entered with respect to investments. The United States, however, would reconsider its inclusion of this provision and would remove it from its model BIT in 1994. The U.S. BITs contained as well a new provision, similarly taken from the European BITs, on losses caused by war and civil disturbance, although it can be argued that this provision merely replicated protection provided by other provisions of the treaty.42

The new U.S. BITs did include a couple of new substantive provisions with no precedent in the European BITs. One required publication of laws relating to investment, language that was based on a provision in the FCN treaties requiring publication of certain laws relating to customs matters.43 Another was a provision requiring each party, upon the request of the other, to provide certain information relating to investment matters. A third was a provision prohibiting performance requirements, that is, investment-related measures that affected trade, such as a requirement that an investment purchase components locally or that it export its product. The insertion of the new performance requirements provision was an effort to address a problem that became a matter of concern after the investment provisions of the FCN treaties had been developed. It reflected the policy of liberal trade that underlay the FCN treaties and was reminiscent of the U.S. practice in the era of the FCN treaties of addressing investment and trade concerns in a single instrument.

The Carter administration’s 1977 decision to launch a new BIT program effectively terminated a U.S. FCN treaty program that only a few months before (p.544) had commemorated the 200th anniversary of its launching by the Continental Congress. Thereafter, when another country approached the United States to inquire about negotiating an FCN treaty, the U.S. response was to propose the negotiation of a BIT instead.

The inauguration of the BIT program reinvigorated the foreign investment policy represented by the FCN treaties. Freed from the cumbersome and complicated context of the FCN treaties in which they had been for so long encased, the investment-related provisions in the BITs proved acceptable to a wide range of countries and, by the early 1980s, the United States was again successfully concluding bilateral treaties for the protection of foreign investment.

The U.S. postwar FCN treaties, however, were the first bilateral investment treaties concluded by the United States or any other country, and they established the foundation on which would be built in the last half of the twentieth century the contemporary international law of foreign investment. Those involved in negotiating the U.S. postwar FCN treaties regarded this as precisely their goal. Herman Walker, a principal negotiator of the U.S. postwar FCN treaties, when evaluating the treaty program in 1956, observed that “[q]‌uantitatively, the group of treaties concluded to date between the United States and like-minded countries since World War II measure perhaps but a modest accomplishment; qualitatively, moreover, shortcomings in the degree of completeness with which they meet all conceivable company requirements are doubtless detectable.”44 Nevertheless, Walker continued, “they mark a definite advance in an area in which progress through multilateral agreements has so far been lacking.”45 Further, “[t]he growth of this pattern, if and as it occurs with the accretion in time of additional examples, should be conducive to the development of international standards of practice … with respect to the treatment of companies.”46

A half-century after Germany signed its BIT with Pakistan, more than 2,500 bilateral investment treaties had been concluded, with approximately 180 countries having concluded at least one such treaty.47 When Canada, Mexico, and the United States negotiated the North American Free Trade Agreement, which was signed in 1992, they included an investment chapter that contained provisions similar to those in the U.S. BITs. In so doing, the United States reembraced the FCN treaty approach that it had abandoned only15 years before, viz. the approach of embedding investment provisions in a larger treaty that deals comprehensively with economic relations between the parties. Since the conclusion of the NAFTA, (p.545) hundreds of free trade agreements (FTAs) with investment chapters have been negotiated worldwide. Further, hundreds of claims have been submitted to binding arbitration under the BITs and the FTAs, and hundreds of millions of dollars in compensation have been awarded to investors. The U.S. postwar FCN treaties laid the foundation for much of the contemporary legal framework for global capitalism. The framework that they contemplated was a projection of New Deal liberalism, a framework in which free enterprise is facilitated and regulated by host state law, subject to basic rule of law principles found in the U.S. Constitution.

U.S. FCN treaty negotiators in the 1940s and 1950s did not remotely foresee the explosion in treaty negotiations that would occur at the end of the twentieth century. Theirs was a world in which foreign exchange reserves were limited, nearly every country was concerned about the impact of capital movements, fear of economic imperialism was epidemic among newly independent developing countries, New Deal liberalism was challenged by both nationalism on the right and socialism on the left and rarely could the United States expect to conclude more than one or two FCN treaties in a year.

Despite the slow pace of negotiations, the State Department persevered with its postwar FCN treaty program in an effort to extend throughout the world the principles of liberal legality found in U.S. constitutional law. The Department noted as much at the end of the Truman administration in a 1952 public policy statement on the postwar FCN treaties, where it observed that “[t]‌heir fundamental objectives—protection of the foreigner, maintenance of good order in everyday business affairs, mutual encouragement of economic development, strengthening the rule of law in the dealings of one nation with another—all are manifestations of friendship between nations and a practical example of how they can act together, under law, for their own and the common good.”48 In sum, said the Department, “When an American goes abroad, these treaties can be for him much the same sort of shield that the Constitution is at home.”49 (p.546)

Notes:

(1.) Signed March 18, 1965, 17 UST 1270, TIAS 6090, 575 UNTS 159. The origins of ICSID are described in Antonio R. Parra, The History of ICSID (Oxford: Oxford University Press, 2012).

(2.) The World Bank consists of two organizations: the IBRD created in 1944 at the Bretton Woods conference described in Chapter 1, and the International Development Association, which provides very low-interest or interest-free loans to the poorest countries.

(3.) Letter of submittal dated February 7, 1966, from Acting Secretary of State George W. Ball to President Lyndon B. Johnson, reprinted in Convention on the Settlement of Investment Disputes, Exec. A, 89th Cong. 2d Sess. (1967).

(4.) Letter dated October 9, 1965, from the National Association of Manufacturers to Senator J.W. Fulbright, reprinted in Convention on the Settlement of Investment Disputes, Exec. Rept. No. 2, 89th Cong. 2d Sess. (1966), page 33.

(5.) See, e.g., Current Economic Developments, June 23, 1953, NARA, Record Group 59, Department of State Lot Files.

(6.) Letter dated October 9, 1965, from the National Association of Manufacturers to Senator J. W. Fulbright, reprinted in Convention on the Settlement of Investment Disputes, Exec. Rept. No. 2, 89th Cong. 2d Sess. (1966), page 33.

(7.) See Report by ICC Committee on Foreign Investment, March 1946, NARA, Record Group 43, International Trade Files, Box 55, Folder marked “Investment.”

(8.) See, e.g., Current Economic Developments, June 23, 1953, NARA, Record Group 59, Department of State Lot Files.

(9.) Letter of submittal dated February 7, 1966, from Acting Secretary of State George W. Ball to President Lyndon B. Johnson, reprinted in Convention on the Settlement of Investment Disputes, Exec. A, 89th Cong. 2d Sess. (1967).

(10.) Convention on the Settlement of Investment Disputes, Exec. A, 89th Cong. 2d Sess. (1967), page 29.

(11.) Ibid.

(12.) Ibid.

(13.) Ibid., page 31.

(14.) Ibid.

(15.) 112 Congressional Record 10122 (1966).

(16.) Convention on the Settlement of Investment Disputes, Exec. A, 89th Cong. 2d Sess. (1967), page 13.

(17.) Ibid., page 3.

(18.) Ibid.

(19.) 112 Congressional Record 9434 (1966).

(20.) Ibid., page 9435.

(21.) Ibid.

(22.) Ibid.

(23.) 112 Congressional Record 10122 (1966).

(24.) Ibid., page 10123.

(25.) J. William Fulbright, The Arrogance of Power (New York: Random House, 1967).

(26.) Vance Hartke, The American Crisis in Vietnam (Indianapolis, IN: Bobbs-Merrill, 1968).

(27.) Treaty between the Federal Republic of Germany and Pakistan for the Promotion and Protection of Investments, signed November 25, 1959.

(28.) Ibid, Protocol, Paragraph 2.

(29.) Ibid., Articles I(2) and 2.

(30.) Ibid., Article 3(1).

(31.) The evolving German practice and the practice of other European countries in the early 1960s with regard to this standard is discussed in Kenneth J. Vandevelde, Bilateral Investment Treaties: History, Policy and Interpretation (New York: Oxford University Press, 2010), pages 243–246.

(32.) Germany-Pakistan BIT, Article 3(2).

(33.) Ibid., Articles 4 and 6.

(34.) Ibid., Article 11(2).

(35.) The evolving German practice and the practice of other European countries in the early 1960s with regard to this standard is discussed in Vandevelde, Bilateral Investment Treaties, pages 195–198.

(36.) Germany-Pakistan BIT, Protocol, Paragraph 1.

(37.) 9 Journal of Public Law 115 (1960). The creation of the German BIT program and the origins and influence of the Abs-Shawcross Convention are described in Lauge N. Skovgaard Poulsen, Bounded Rationality and Economic Diplomacy: The Politics of Investment Treaties in Developing Countries (Cambridge: Cambridge University Press, 2015), pages 50–54. See also Rudolf Dolzer and Yun-i Kim, “Germany” in Chester Brown, ed., Commentaries on Selected Model Investment Treaties (Oxford: Oxford University Press, 2013), pages 292–295.

(38.) Ibid., pages 119–121. The provisions drawn from the U.S. postwar FCN treaties were the requirements of fair and equitable treatment, most constant protection and security, and payment of compensation for expropriation and the prohibition on unreasonable or discriminatory treatment. The new substantive provision was one requiring each party to observe undertakings with respect to investment.

(39.) Mark S. Bergman, “Bilateral Investment Protection Treaties: An Examination of the Evolution and Significance of the U.S. Prototype Treaty,” 16 New York University Journal of International Law and Politics 1, 3 (1983).

(40.) I have traced the origins of the provisions in the European bilateral investment treaties in Vandevelde, Bilateral Investment Treaties.

(41.) Senator Frank Church was one of the sponsors of the Cooper-Church Amendment and the Case-Church Amendment, which sought to end U.S. military intervention in Southeast Asia. Prior to his election to the Senate, Claiborne Pell was a foreign service officer in the State Department who participated in the 1945 San Francisco Conference that produced the United Nations Charter. His opposition to the war is described in G. Wayne Miller, An Uncommon Man: The Life and Times of Senator Claiborne Pell (Lebanon, NH: University Press of New England, 2011).

(42.) See Kenneth J. Vandevelde, U.S. International Investment Agreements (New York: Oxford University Press, 2009), pages 432–433.

(43.) This provision is discussed in Chapter 8 in the section on transparency.

(44.) Herman Walker Jr., “Provisions on Companies in United States Commercial Treaties,” 50 American Journal of International Law 373, 393 (1956).

(47.) The United Nations by the end of 2008 had identified 2,676 bilateral investment treaties plus another 273 free trade agreements with investment-related provisions similar to those found in bilateral investment treaties. United Nations Conference on Trade and Development, Recent Developments in International Investment Agreements (2008–June 2009) (Geneva: United Nations, 2009).

(48.) Department of State, Office of Public Affairs, Commercial Treaty Program of the United States (Washington, DC: Government Printing Office, 1952), copy available at NARA, Record Group 59, Department of State File No. 611.004/3-453.

(49.) Ibid.