Mr. Chairman, Members of the Subcommittee, thank you for the opportunity to speak to you today about this critical issue on behalf of the 11 million working men and women of the AFL-CIO.

As you know, trade and investment issues are enormously important to America’s working families – impacting our jobs, our wages, our unions, and the government regulations we count on to keep our communities healthy and to safeguard our rights. Of course, these rules also affect workers and the environment in other countries, so our ultimate goal is to reform these rules in a way that strengthens democratic procedures, improves transparency, and protects workers and the environment both here and abroad.

We have long expressed concern over the investment provisions included in U.S. Bilateral Investment Treaties (BITs) and Trade Agreements. While we understand and support the importance of protecting the rights of investors, we believe that existing investment provisions in U.S. investment and trade agreements are imbalanced in two crucial aspects.

First, they significantly enhance the rights of investors vis-à-vis governments, but they fail to establish commensurate responsibilities for investors, particularly with respect to workers’ rights and the environment.

Second, they give substantive rights and procedural advantages to foreign investors that are not available to domestic investors. This raises the possibility that investment tribunals can be used to circumvent the democratic process and to achieve deregulatory outcomes in a secretive and inaccessible forum. Certainly the experience with the investment chapter of the North American Free Trade Agreement (NAFTA) and current BITs reinforces these concerns.

We have democracy and good governance concerns about the investment provisions, as well as job concerns. Investment protections in international agreements are designed to enhance the security of foreign direct investment and address investors’ concerns with respect to unstable or corrupt governments where production may be located. In this sense, these provisions are a critical element in the trade agreements negotiated by our government over the last two decades. Negotiated and reciprocal tariff reductions are paired with enhanced security of investment and upward harmonization of domestic laws to prevent overly “intrusive” regulation of foreign investment. This combination facilitates and accelerates the offshoring of American jobs – precisely because for the most part there has been no commensurate set of investor obligations.

As we stated in a 2004 letter sent to the State Department with regard to the draft model BIT: “We believe that expansion of investment can and must be made compatible with the protection of the public interest in the United States and overseas.” The full text of the letter, sent jointly by the AFL-CIO, the Center for International Environmental Law, Earthjustice, Friends of the Earth-U.S., the National Wildlife Federation, Oxfam America, and Sierra Club is available at: http://ciel.org/Publications/BIT_Comments_Jan1604.pdf

While there have been several notable attempts in recent years to address these concerns – first to revise the model BIT (in 2004) and, second, to alter the investment chapter in trade agreements (in 2007, when Democratic leaders in Congress pressed for the inclusion of new investment language in pending trade agreements), these revisions have not yet gone far enough to address the fundamental problems outlined here.

My fellow witness, Alan Larson, and I have been asked to co-chair a subcommittee of the State Department’s Advisory Committee on International Economic Policy (ACIEP) to review the draft model BIT and present our conclusions to the ACIEP. We are looking forward to a constructive dialogue with a diverse and representative group and hope that the subcommittee will be able to take a fresh look at this issue and work toward consensus on how to move this discussion forward.

The key areas of concern for the AFL-CIO with regard to current investment provisions include: investor-state dispute resolution; failure to distinguish between legitimate regulatory action on the part of government and “indirect expropriation”; an overly broad definition of investment; potential impact on needed future national and global financial regulation efforts; and the need to establish commensurate and enforceable responsibilities for investors with respect to workers’ rights and the environment.

Investor-State Dispute Resolution

The investor-state dispute settlement mechanism gives investors the right to bypass domestic complaint procedures and mount legal challenges that would not be permitted under domestic law. In the context of trade agreements, no other non-government actors are given similar rights to seek redress without the support of their own government.

President Obama has stated that he is opposed to “granting foreign investors any rights in the U.S. greater than those of Americans.” [1] Yet by construction, international investor-state dispute resolution grants greater rights to foreign corporations than those enjoyed by Americans. This is evident, for example, in NAFTA investment cases, where corporations have taken advantage of foreign subsidiaries or citizenship to file cases in their own country – circumventing domestic democratic processes.

Indirect Expropriation

It is absolutely essential that international investment provisions distinguish in a clear and explicit way between legitimate government regulation and expropriation – or seizure – of an investor’s property. In our view, governments should not be expected to compensate corporations – domestic or foreign – for the imposition of legitimate government regulation in the public interest – to protect public health, the environment, or workers’ rights, among other things.

Capital Controls

We are concerned that current provisions on financial transfers would limit governments’ ability to use legitimate measures designed to restrict the flow of capital in order to protect themselves from financial instability. Without adequate measures to prevent and respond to such financial instability, broad sustainable development will remain out of reach for many developing countries. The increased frequency and severity of financial crises also hurts U.S. economic interests, as crisis-stricken countries devalue their currencies and flood the U.S. market with under-priced exports in order to recover.

The United States should ensure – for the sake of developing economies, international financial stability, and its own economic interests – that countries have the policy flexibility needed to impose capital controls in appropriate circumstances. Also, as the international community begins an important discussion on global financial regulation, it is crucial that these international investment agreements not provide an obstacle to needed regulatory reform.

Environment and Labor

The 2004 model BIT includes articles on environmental and labor commitments that reflect the important recognition that investments may compromise environmental quality and workers’ rights and that a country may weaken environmental protection and labor standards in order to attract investments. These provisions need to be significantly strengthened, however.

First, the content of the obligations is extremely limited, as evidenced by the use of “each Party shall strive to ensure,” instead of a mandatory “shall ensure.” Second, each provision has a footnote that limits its scope solely to federal laws and regulations, leaving aside all other sub-national laws. This limitation is particularly noteworthy given that the scope of the draft model BIT otherwise covers measures adopted or maintained by a Party, which includes all governmental organs and other entities exercising public functions. Third, the procedural mechanisms to ensure compliance with these provisions are also exceptionally weak, as further proceedings beyond consultations are excluded.

Finally, the second paragraph of Article 12 attempts to safeguard a Party’s ability to adopt, maintain, or enforce measures necessary for the protection of the environment. Given the broad range of government measures an investor could challenge under the draft model BIT, it is essential that this safeguard be binding and effective, and that it apply to environmental protection measures as well as other governmental measures vital to the public interest, such as laws protecting consumers, health and safety, and workers’ rights and human rights. Yet there is no provision analogous to Article 12(2) under the labor article or any other place in the model BIT. Unfortunately, even the limited safeguard for environmental protections in Article 12(2) is rendered meaningless by the qualification that only those environmental measures “otherwise consistent with this Treaty” may be protected from challenge. Thus, the use of Article 12(2) as a defense or exception to the other substantive obligations of the BIT appears to have been severely constrained or even eliminated. Article 12(2) cannot operate as a defense or exception to the other substantive obligations of the BIT, which in effect means that a Party may be ordered to pay damages to an investor even for adopting a measure necessary to protect the environment.

Conclusion

I would like to thank and congratulate the Subcommittee for holding this hearing today. It is both timely and relevant to review the elements of investment obligations in U.S. trade and investment agreements. We hope this will be only the first step in a more comprehensive review of U.S. trade and investment policy aimed at supporting the creation of good jobs at home and abroad and laying a foundation for sustainable, democratic, and equitable development. I look forward to your questions.

[1] Barack Obama for President, A Blueprint for Change, Strengthening the economy: Trade, 13, available at http://www.barackobama.com/issues/ (viewed August 24, 2008).