On April 20, 2012, the Obama Administration completed its three-year-long review of the U.S. model bilateral investment treaty (BIT) and revealed a new model BIT that will form the basis for future bilateral investment negotiations with other countries, including investment chapters of U.S. free trade agreements. BITs are international agreements that provide binding legal rules regarding one country’s treatment of investors from another country. They provide investors with improved market access; protection from discriminatory, expropriatory, or otherwise harmful government treatment; and a mechanism for investors to pursue binding arbitration against host governments for breaches of the treaty. As detailed below, the 2012 model BIT clarifies its applicability to state-owned enterprises (SOEs), and includes new disciplines on performance requirements, labor rights, environmental protections, and regulatory transparency.

There are over 3,000 BITs worldwide, of which the United States is party with only 41 countries, in addition to free trade and investment agreements with 19 additional countries. Now that the 2012 model BIT has been released, many U.S. business groups have called on the administration to resume BIT negotiations with China, India, Vietnam and Mauritius, which began under the Bush administration but had been stalled at the technical level since February 2009 when President Obama initiated the model BIT review. Last week, both India and Russia publicly indicated that they were interested in engaging in talks to conclude a BIT with the United States. Two weeks ago, at a speech in Brasilia, Secretary of State Hillary Clinton said that the United States and Brazil should explore a BIT. Thus, it is likely that, in the near future, some BIT negotiations will resume and others will begin.

State-Owned Enterprises and Forced Technology Transfer

The new model BIT clarifies that BIT disciplines apply to SOEs by defining when government authority has been “delegated” to an SOE. Specifically, government authority that has been delegated “includes a legislative grant, and a government order, directive or other action transferring to the state enterprise or other person, or authorizing the exercise by the state enterprise or other person of, governmental authority.” Other than this clarification, however, the 2012 model BIT does not impose any of the additional disciplines or remedies related to SOEs currently being negotiated in the Trans-Pacific Partnership Agreement.

There is also new language designed to prevent “performance requirements” and forced technology transfer as conditions for investment approval. Specifically, no party may require the purchase, use or accord a preference to domestically developed technology in order to provide an advantage to a party’s own investors, investments or technology. These provisions do not apply to government procurement.

More Binding Disciplines and Stronger Enforcement Provisions

In addition to core investment protection provisions from the 2004 model BIT, the 2012 model BIT includes stronger provisions on labor rights and environmental protections and enforcement including provisions that prohibit parties from: (1) waiving or otherwise derogating from their labor and environmental laws in a manner inconsistent with basic protections those laws provide; and (2) failing to effectively enforce its labor and environmental laws in order to encourage investment in its territory. The new model BIT gives parties the opportunity to request consultations when it believes that its BIT partner is not upholding its obligations under the BIT’s labor and environmental provisions, however, such provisions are still not subject to the BIT’s state-to-state and investor-state dispute settlement procedures.

New Environmental Provisions

The 2012 model BIT explicitly states that the parties recognize the importance of multilateral environmental agreements, and defines what constitutes an “environmental law” for the purposes of BIT obligations, which excludes laws and regulations related to worker safety or health.

New Labor Provisions

The new model BIT reaffirms each parties’ obligations as members of the International Labor Organization (ILO) and the commitments under the 1998 ILO Declaration on Fundamental Principles and Rights at Work and its Follow-Up. The new model BIT also adds a new labor right: “the elimination of discrimination in respect of employment and occupation.“

Enhanced Regulatory Transparency

New model BIT provisions require each party to publish proposed regulations in a single official journal at least 60 days before the date public comments are due. Proposed regulations must include an explanation of the purpose and rationale of such proposals. Final regulations must address significant substantive comments received and explain any substantive revisions made to the proposed regulations.

In addition, the 2012 model BIT enhances the opportunities for private companies to participate in the setting of standards, technical regulations, and conformity assessment procedures in host countries, both at the central government and non-governmental organization levels.

How Does This Affect My Company?

Whether your company is focused on the U.S. market or expanding operations abroad, staying abreast of upcoming BIT negotiations could be critical to your business in several ways - some beneficial and some adverse. BIT benefits can include new market access through foreign investment protections and increased regulatory transparency in key and emerging markets abroad. The enhanced disciplines on labor rights and environmental protection require BIT partners to enforce such laws in their home markets, ensuring that U.S. companies have a level and transparent regulatory playing field. Further, the new disciplines prevent forced technology transfer and other discriminatory performance requirements on U.S. companies who want to invest abroad. On the other hand, some of the new protections afforded by the new U.S. model BIT could make it make more difficult to negotiate BITs with countries like China moving forward. Lastly, once in effect, new BITs will result in increased inbound investment into the United States and thus increased competition for sensitive domestic products and services.

Please contact Paul Rosenthal or Kathleen Cannon if you have any questions or concerns about how BIT negotiations may be advantageous or adverse to your business. As BIT negotiations resume and begin, we would be happy to provide you with a customized analysis and monitor developments affecting your interests.

For more information about this advisory please contact:

Paul Rosenthal
(202) 342-8485
prosenthal@kelleydrye.com

Kathleen Cannon
(202) 342-8590
kcannon@kelleydrye.com