Global Policy Forum

By Emad Mekay

Trade and investment disputes involving dozens of millions of dollars are growing worldwide and threaten to undermine the meaning of many economic treaties, a United Nations organization warned Monday.

At least 50 governments -- 31 in the developing world, 11 in developed countries and eight in transition economies -- have faced arbitration over their investment rules, at a cost of tens of millions of dollars, adds the report by the United Nations Conference on Trade (UNCTAD). Critics of the current global trade system championed by rich, industrialised nations and economic institutions like the World Bank, International Monetary Fund (IMF) and the World Trade Organisation (WTO) have long said the system places developing nations under the control of major corporations in the West. The cases taken to arbitration -- often by companies challenging a government's investment rules -- cover a broad range of measures like emergency laws put in place during financial crises, value-added taxes, re-zoning of land from agricultural use to commercial use and measures concerning hazardous waste facilities. These cases cost poor nations money, even when they defeat the challenges, because of the price of waging a defence, says the report.

Argentina leads all countries, having faced 37 recent claims, 34 related at least in part to that country's financial crisis starting in 2001. Mexico has the second highest number of known claims (14), most of them falling under the North American Free Trade Agreement (NAFTA). The United States, the world's largest economy, also faces a significant number of challenges (10), all of them under NAFTA, which binds the three North American nations: Canada, the United States and Mexico. Poland faces seven claims, followed by Egypt at six and by four countries that each face four claims: Canada, Chile, the Czech Republic and Ukraine. In 2003, for example, the Czech Republic was ordered to pay some 270 million dollars, plus substantial interest, to a Dutch-based broadcasting firm following a tribunal's finding that the republic's media regulatory authorities had violated the terms of an investment treaty with the Netherlands.

Oil giant Occidental in 2002 won a claim against Ecuador that led to an award of 71 million dollars plus interest. The firm had accused the South American nation of violating a bilateral investment deal with the United States. The number of treaty-based cases brought before the World Bank Group's International Centre for Settlement of Investment Disputes (ICSID) rose from three at year-end 1994 to 106 this month, adds the report. The ICSID arbitration facility is the only one to maintain a public record of claims, although others exist around the world. Those other facilities are now hearing 54 cases, according to the UNCTAD report, compared to just two at the end of 1994. The total of all known cases brought under bilateral, regional or multilateral deals that contain investment clauses or international investment agreements (IIAs), is now 160, it adds.

International investment disputes can also arise from contracts between investors and governments. A number of such disputes are, or have been, before the ICSID but are not included in the U.N. body's report. Well over one-half, 92, of the 160 known claims were filed within the past three years; none of them was initiated by governments. Development groups say that with so many claims ongoing, uncertainty is growing around the meaning of key treaty provisions. "The trend is not new to me, and I think it definitely can be taken as proof of one of the many asymmetries in the trade system," said Aldo Caliari of the Washington-based Centre of Concern. "To me, more than the issue of whether developing countries are getting a worse deal than developed ones, is the regulatory uncertainty created and the way the trend empowers investors versus governments," he added in an interview.

UNCTAD says the findings demonstrate that governments have to practise much more caution in negotiating deals. "All of this means that governments need to be very careful when negotiating investment treaties," said Karl P Sauvant, director of UNCTAD's Division on Investment, Technology and Enterprise Development, in a press release Monday. The report says however that the case of Argentina, former poster child of the IMF and World Bank, has greatly inflated the usual number of challenges. Since the country's 2001 financial crisis, foreign investors have claimed compensation for losses in such industries as gas and oil production, telecommunications, electricity and water distribution.

In 2003 alone, 20 transnational corporations filed lawsuits against Argentina, claiming violations of investment treaty guarantees. Eight more ICSID cases had been launched against the nation as of Nov. 24. Such costly actions further saddle the already struggling nation with burdens, according to UNCTAD. But even when excluding all the Argentine claims to date, the number of cases is still on the rise, points out the report. Also, because investors and governments prefer confidentially and because many disputes are still in early stages, many problems facing developing nations happen away from the public eye. "The number of treaty-based investment disputes is thus likely to be higher than the available figures indicate," says the report. "It is evident that the number of arbitration proceedings is growing steadily and is likely to continue to do so," it concludes. "In addition, more investment may lead to more occasions for disputes -- and more occasions for disputes combined with more IIAs are likely to lead to more cases." The increase in disputes point to an apparently rising trend among foreign investors to sue, finds the report. "It's worrisome that the numbers shown seem to be just the tip of the iceberg," adds Caliari.

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