FTA With Andean Nations Needs Mechanism to Resolve Investor-State Disputes

International Trade Reporter

Volume 21 Number 13
Thursday, March 25, 2004 Page 543

International Agreements
FTA With Andean Nations Needs Mechanism
To Resolve Investor-State Disputes, TPSC Told

By Rossella Brevetti

The free trade agreement the United States plans to negotiate with the Andean countries of Bolivia, Colombia, Ecuador, and Peru should contain an investor-state dispute settlement mechanism, witnesses at a Trade Policy Staff Committee hearing on the Andean FTA said March 17.

Lionel C. Johnson, vice president and director for international government affairs at Citigroup Inc., and Robert Vastine, vice president of the Coalition of Service Industries, said that the investor-state dispute settlement mechanism should be maintained.

Vastine, who characterized investor-state dispute settlement as "absolutely essential," cautioned against following the example of the U.S.-Australia FTA, which does not contain such a mechanism. He said that the investor-state mechanism should apply retrospectively as well as prospectively.

Johnson urged the negotiating team to keep all issues on the table in the interest of getting the broadest possible agreement. The administration has been criticized by free trade advocates for removing sugar from the scope of the Australia FTA.

Such dispute resolution mechanisms would allow corporations to take investment disputes over government actions to an independent panel. Critics argue that such panels are less transparent and accountable than domestic courts and can subject a country’s environmental and other policies to challenges from multinational corporations.

Council of the Americas Vice President for Washington Operations Eric Farnsworth said that the Council had recently tried to address investment disputes with Peru that could impinge on the willingness of the private sector to advocate strongly for the FTA. He cited the fact that the country’s internal revenue service—contrary to Peru’s policies—has retroactively assessed foreign direct investors as recently as December 2003.

The interagency TPSC held the hearing as part of the effort to solicit public comment to help the Office of the U.S. Trade Representative to clarify negotiating objectives for the agreement.

Sugar Lobby

Noting that sugar is included in the U.S.-Central America Free Trade Agreement, Sweetener Users Association Chairman Lee McConnell said there was no reason to treat the Andean countries less favorably than the CAFTA countries. The SUA’s members include manufacturers of confectionery, grocery products, dairy foods, soft drinks, and other products made with caloric sweeteners like sugar.
McConnell said that the agreement should be comprehensive and should not exclude sugar or any other product. When one party removes import sensitive products from the negotiation, it gives the other party license to do likewise, he remarked. "Those items likely to be import-sensitive to the Andean nations ... are also likely to be potential growth opportunities for American producers," he stated.

The U.S. sugar industry has long maintained that worldwide distortions in sugar markets need to be negotiated in the World Trade Organization—not in bilateral free trade agreements. Jack Roney, director of economics and policy analysis for the U.S. Sugar Industry Group, said that the U.S. sugar market is already oversupplied. "Opening markets to additional imports through FTAs will render our domestic support program unworkable and, lead, ultimately to a collapse of the U.S. sugar market," he said in a statement.

He noted that the Andean countries are substantial sugar producers with exports totaling over 1.3 million tons a year.

Move Away From Unilateral Preferences

Also testifying at the hearing, Stephen Lamar, senior vice president, American Apparel & Footwear Association, said that the proposed agreement would have a small but "demonstrably positive" impact on the industry and on the U.S. economy.
He noted that the four Andean countries receive benefits under the Andean Trade Promotion and Drug Eradication Act. However, not all trade is covered by the ATPDEA program, he said, noting that only 66 percent of garments from the Andean region come in under the preferential provisions. Six percent of imports pay a partial duty and the remaining 28 percent pay full duty.

Moving from unilateral preferences to a full FTA would have several benefits, including creating additional markets for U.S. inputs and fostering business certainty, Lamar said.

Further, he said that the agreements pose minimal risk of injury to the United States since import penetration in the apparel industry is about 96.6 percent and about 98.5 percent for the footwear industry. Compared with total worldwide imports, the region does not represent significant sources of apparel or footwear, he said.

Lamar called for a flexible and simple rule of origin for the Andean region and for common sense customs procedures.

"If apparel and footwear companies have more options as they source their inputs in a particular FTA, they can manufacture a product that can be competitive in the U.S. market. At the same time, the more restrictive and cumbersome the rule of origin is, the more difficult it is to produce an article under the specific terms of the FTA," he stated.