Hearing of the Trade Subcommittee of the House Ways and Means Committee - Investment Protections in U.S. Trade and Investment Agreements

Statement

Chaired By: Rep. Sander Levin (D-MI)

Witnesses: Thea Lee, Policy Director And Chief International Economist, AFL-CIO; Alan Larson, Senior International Policy Advisor, Covington and Burling LLP.; Theodore Posner, Partner, International Trade Group, Crowell & Moring; Robert Stumberg, Professor of Law and Director, Harrison Institute for Public Law, Georgetown University Law Center; Linda Menghetti, Vice President, Emergency Committee for American Trade

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REP. LEVIN: Let's start. The rumor is we may have unusually early votes -- at least one early vote. So let me make a very brief opening statement and -- and the ranking member, my colleague, Mr. Brady, will do the same, and see if we can at least begin the testimony before the vote. It isn't certain but it -- it's likely.

So today we're going to take up an important issue regarding the investment provisions. My feeling is this -- that by definition trade issues are complex, they're controversial, and that's especially true if we believe that we both have to expand trade and to shape the content and the course of it. I don't think trade is automatically win-win. There are ups and downs to -- to most trade issues, and I think that's the spirit within which we have to examine all of the key issues relating to the expansion of our international trade.

So today we're going to focus in, I think, a very constructive way and take a further look on the investment provisions that are in U.S. trade agreements and in our bilateral investment treaties. As we know, these provisions were originally designed to make sure that the investments by U.S. citizens overseas were safeguarded -- were protected from expropriation without compensation and without due consideration, and to make sure that there wasn't discriminatory or inequitable treatment by foreign governments.

The question today is whether we have an appropriate balance, and issues have been raised -- and I think often in a constructive way, perhaps sometimes not -- about the provisions in our FTAs and whether the provisions today adequately articulate what would be called a balanced approach -- issues like the minimum standards of treatment. There were some original provisions in NAFTA, as we know, and there then were some changes made a few years ago. The new administration is taking a new look at trade policy as they are at other key issues, and what the administration has now done is to undertake a review of these investment provisions both in our FTAs and in our bilateral investment treaties, and it has set up an advisory committee within the State Department. The Advisory Committee on International Economic Policies formed a subcommittee to review these investment issues.

And we're fortunate today to have the co-chairs of this subcommittee, Ambassador Alan Larson and Thea Lee. So we welcome the two of you. I assume you'll probably say that you're not speaking as co-chairs but individually, but we're glad you're both individuals and co-chairs. Also testifying today is Georgetown University professor Robert Stumberg -- welcome; Linda Menghetti who's from ECAT; and Ted Posner. So we look forward to hearing from all of you and we will hear your testimony after Mr. Brady gives his opening statement.

I think the clock isn't working. With one minute left we'll give you some kind of a signal. Also, if I might say, Mr. Brady, that I'd like (us ?) very much if we could be as informal as possible and each of us have Q and A but see if we can have also some discussion among the five of you because I think we'll benefit from that. So welcome and now, Mr. Brady, your opening remarks.

REP. KEVIN BRADY (R-TX): Great. Thank you, Chairman Levin, for calling the hearing on -- on investment. A hearing is exactly what we need on this topic. There is so much misinformation out there about the investment protections in our bilateral investment treaties and our trade agreements. The myths abound because investor-state mechanisms is just so easy to demagogue, and unfortunately there will always be people who reflexively oppose trade.

This hearing, however, is an opportunity to shine a light on the fact and to set the record straight. First of all, and perhaps most importantly, we don't need to fear foreign investment. As we know, it is not simply enough to buy American anymore. We have to sell American products and goods throughout the world.

Some of our companies can do that from here. Others, to compete, have to compete throughout the world. According to our Commerce Department, U.S. companies that have these foreign operations employ twice as many U.S. workers than they do foreign workers. Furthermore, 95 percent of the goods and services produced by these companies abroad are sold not back here but rather in the host or the third country jurisdiction.

Much has been made of buy America recently but U.S. investment abroad allows us to sell America, which is what it will take for the United States to lead the world out of the global economic crisis. The following point is perhaps already evident but it needs to be highlighted. The United States is the party insisting on legal and procedural protections for outbound U.S. involvement. U.S. bilateral investment treaties and investment chapters in our bilateral and regional free trade agreements benefit (our guys ?).

We demand these provisions because they safeguard U.S. investment in foreign countries by shielding the investment from expropriation without compensation as well as from discriminatory inequitable treatment by foreign government. Put another way, the core purpose of these legal instruments is to raise the level of investment in property rights protections in foreign jurisdictions to the level of protection that already exists here in the United States. Investor- state mechanism is designed to accomplish the same fundamental goal. It's meant to raise for U.S. investors abroad the level of protection, in this case the settlement due process right, that exists for the equal benefit of domestic and foreign investors here in the United States.

In fact, investor-state mechanism is often credited with helping to instill the rule of law in developing countries. In a sense, the investor-state mechanism allows the United States to export our constitutional procedural due process standard to our trading partners. I have no problem with that. I'm sure we'll hear today the investor-state mechanism exposes the United States to an endless stream of costly, frivolous, and invasive arbitration brought by foreigners.

Well, I've looked into the allegation and here's what my research shows.

Investor-state mechanism has existed in U.S. bilateral investment treaties since the very first ones we entered in in the early 1980s. It's been around for a quarter century and it's never been used against the United States. We've never been forced to defend a single law, regulation, or administrative action in a bilateral investment treaty investor-state dispute.

In the handful of cases that foreign investors have brought under NAFTA, we have not to date -- we've not to date lost or settled on unfavorable terms one single case. You don't need to take my word for it. Consider this excerpt from the summer of 2008 issue of the Harvard Journal on Legislation, and I quote: "The United States has never lost a single dollar in investor-state dispute under NAFTA or under any other trade agreement or bilateral investment treaty," unquote.

The author? Our chairman of the Ways and Means Committee, Charles Rangel. The last point I'll make is that the provision U.S. BITs and investment chapters of our free trade agreement have evolved over the years. I'm eager to hear the testimony on this point because the evolution of the provision, it seems to me, has been in direct response to the criticism raised.

Changes and clarifications that were made to our investment language include provisions to require that panels consider the same U.S. Supreme Court factors that U.S. courts consider when determining whether there's been an expropriation of property, provisions to allow panels to dismiss frivolous claims at an early phase of the proceeding, and provisions that clarify that environmental and other public welfare regulations are presumed not to constitute indirect expropriation. Furthermore, the landmark May 10th deal added language (to Peru ?) in our pending free trade agreements with Colombia, Panama, and South Korea, and foreign investors are not accorded greater substantive rights with respect to investment protections than domestic investors under domestic laws in the U.S.

These changes taken together strike me as a compromise that aims for the right balance between the interest of U.S. regulators on the one hand and U.S. investment abroad on the other. I welcome all the witnesses this morning, look forward to your testimony. Mr. Chairman, I yield back.

REP. LEVIN: Thank you. (Right in ?) five minutes. So why don't we go down the line? I'm not sure of the protocol so we'll use -- we'll use how you're seated. So Thea Lee, if you would begin and we look forward to your testimony.

All of your testimonies will be in the record so deal with your five minutes or so as you would like. And again, welcome to all of you. Thank you for coming. This is really an important hearing on an important issue that needs to be discussed. Ms. Lee?

MS. LEE: Thank you so much, Mr. Chairman. Thank you, Mr. Brady, members of the subcommittee. Good morning. I appreciate the opportunity to come speak to you today on behalf of this -- of AFL- CIO's 11 million working men and women on this important issue. As you all know, trade and investment issues are enormously important to America's working families. They impact our jobs, our wages, our unions, and the government regulations that 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, and 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. And, of course, we understand that we're in a global economy and we will always continue to be in a global economy. The question really is whether the trade and investment rules that we've put in place can be made fairer and more balanced so that they serve the interests of -- of my members, among others. We've had a long concern -- longstanding concern over the investment provisions included in U.S. bilateral investment treaties and in trade agreements.

We understand and support the importance of protecting the rights of investors, but we also believe that the existing investment provisions in U.S. investment and trade agreements are imbalanced in two crucial aspects. And I think it's worth remembering that the origin of these rules were, as Mr. Brady said, to protect outward foreign direct investment generally in small developing countries in the bilateral investment treaties. It's not clear that they were designed to be a two-way street where they could be used with major industrialized countries like Canada with big corporations that had presence in both countries being able to use them in the United States as well as for U.S. investors as they have an outward interest as well.

And I think that's one of the key issues towards whether these -- these provisions continue to be appropriate given how they have evolved and how their use has spread now into bilateral free trade agreements as well as possibly investment treaties with large countries like China where there may be a particular concern. The first problem that we see is that these agreements significantly enhance the rights of investors vis-à-vis governments, but they fail to establish commensurate responsibilities for investors, particularly with respect to worker rights and the environment.

The second problem is 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 secret and -- secretive and inaccessible forum. Certainly, the experience that we've had with the investment chapter of the North American Free Trade Agreement and current bilateral investment treaties reinforces these concerns, both in the inward and the outward direction, and we have two kinds of concerns with the investment provision: democracy and good governance concerns and I think some of my colleagues on the panel will speak to those issues, as well as job concerns. And I just want to take a minute to talk about why, from the labor movement's point of view, these issues are important to us.

The -- the investment protections 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 (these ?) sense, these provisions are a critical element in the trade agreements that we've negotiated over the last decade and a half. The tariff reductions that we negotiate are paired with enhanced security of investment and upward harmonization of domestic laws to prevent overly intrusive regulation of foreign investment. But this combination both facilitates and accelerates the offshoring of American jobs precisely because for the most part there has been no commensurate set of investment obligations.

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, as Chairman Levin said, so that we can review the draft Model BIT and present our conclusions to the Advisory Committee on International Economic Policy. We're really looking forward to a constructive dialogue with a diverse and representative group and we 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.

And our key areas of concern include the investor-state dispute resolution mechanism, the failure to distinguish between legitimate regulatory action on the part of government and indirect expropriation, the overly broad definition of investment, the potential impact of these investment provisions 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.

Let me thank and congratulate the subcommittee for holding this hearing today. It's both timely and relevant and 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. Thank you very much and I look forward to your questions.

REP. LEVIN: You -- you did this in exactly five minutes. (Laughter.) Ambassador?

MR. LARSON: I'll try to do as well. Chairman Levin, Ranking Member Brady, and members of the Subcommittee on Trade, my name is Alan Larson. I am an economist, a senior international policy advisor at Covington & Burling, and a former under secretary of state for economics under the administrations of George W. Bush and William Clinton.

International investment plays an essential role in sustaining the economic health of the United States.

Inbound investment puts foreign capital to work in our country supporting output and jobs. It also bridges the gap between our low national savings rate and our large investment needs. During the recent global financial and economic crisis, international investors have made investments in troubled U.S. companies including in financial services firms and automobile companies.

They have been very, very valuable to our economic strength. Outbound investment also is valuable. It opens access to and increases supplies of critical raw materials. It also provides channels through which a substantial share of U.S. exports flow.

International agreements help provide a stable and predictable legal and regulatory environment for international investment. Bilateral investment treaties, for example, provide assurance of non- discriminatory treatments, specifically most favored nation treatment and national treatment subject to clearly specified exceptions. They also provide a minimum standard of treatment grounded in customary international law.

This standard is expressed in the concept of fair and equitable treatment. Investment treaties limit the circumstances under which a host government can expropriate an investor's property, and if a expropriation does occur they require prompt, adequate, and effective compensation. The expropriation clause of bilateral investment treaties is modeled closely on the takings clause of the United States Constitution. The BITs also provide investor-state dispute settlement through international arbitration.

The model that -- that is used as the template for launching negotiations with a new partner has periodically been reviewed and revised with the last review taking place in 2004. I am honored to be serving along with Thea Lee as co-chair of a private sector advisory panel that will contribute input to the administration's review of the Model Bilateral Investment Treaty.

As you said, Mr. Chairman, our report will go to the Advisory Committee on International Economic Policy which itself is a private sector advisory committee established under FACA. Thea and I intend to assemble a panel of private sector experts with a variety of points of view that can inform our deliberations and inform the report that we will provide for ACIEP. This report, I understand, will be part of a broader outreach process on the part of the government that could include such things as public hearings and a notice and comment process.

For the purposes of our panel, I -- I expect we will want to look at the experience of the United States with international investment agreements. We'll want to consider the role that these agreements play in the new economic circumstances our country now finds itself in, and we'll want to consider whether we have recommendations on how these agreements -- agreements I consider to be very, very good agreements -- could be made even better. Thank you, Mr. Chairman.

REP. LEVIN: Thank you very much. Mr. Posner, welcome. You've been in this room before.

MR. POSNER: Indeed I have, and it -- it's very good to be back and I thank you, Mr. Chairman, and Ranking Member Brady and members of the subcommittee for the opportunity to -- to testify today. My name is Ted Posner, and I am a partner in the international trade and international arbitration groups at the law firm of Crowell & Moring.

Prior to my return to private practice at the beginning of this year, I had the good fortune to work on the law and policy of international investment both in the Congress and in the executive branch, including as your trade counsel, Chairman Levin, then as trade counsel to the Senate Finance Committee where I was deeply engaged in drafting the investment-related provisions of the Bipartisan Trade Promotion Authority Act of 2002, and then as an attorney in the Office of the U.S. Trade Representative where I participated in most of the negotiations under the 2002 framework, as well as in the 2004 revision of the Model Bilateral Investment Treaty to which Ambassador Larson alluded a moment ago.

Today, I want to make three points. First, investment protections in bilateral investment treaties and free trade agreements together with the availability of a neutral forum in which to assert those protections provide an essential set of rights to U.S. persons doing business in a globalized economy. They facilitate precisely the kind of economic activity we should be encouraging in our efforts to reverse the economic downturn.

Second, a sustainable international investment policy requires a balancing of interests. As Chairman Levin said in his opening remarks, the question of the day is have we achieved that appropriate balance. I contend that that balance was achieved in the Trade Act of 2002 and that no developments since then warrant a disrupting of that balance.

And finally, I want to note that discussions of this topic frequently have been muddied by misunderstandings of what BITs and FTAs require of host governments and what they don't require, and I'd like to clarify a few of those misunderstandings. To appreciate the value of investment treaties and agreements, it is useful to consider the situation a U.S. investor faces in a foreign country in the absence of such instruments. As a practical matter, in the absence of treaty protections or domestic legislation providing for international remedies, that investor can rely only on the rights afforded by the domestic law of the host country.

Often, those rights will not be easily accessible to an outsider, and to defend its right the investor's only recourse usually will be the local court system, which will require the investor to be familiar not only with local substantive law but also with all of the technical aspects of local procedural law and customs. If that fails, the investor may seek the assistance of the U.S. government, in which case its interests will be competing with diplomatic, national security, and other interests. And if the investor is doing business in multiple countries, its familiarity with its legal rights in one will give it no comfort in others. A treaty or agreement changes all of that.

It puts the relationship between the United States investor and the host country on an international law footing. Now, the investor is protected not only by the domestic laws of the host but also by a set of rights that is common across multiple countries, and that investor is able to assert those rights before a neutral tribunal under rules that will vary only slightly from agreement to agreement. By facilitating investment in this way, investment protections serve as an engine of economic growth.

Critics of this view say that it gives undue weight to the interests of companies doing business abroad while giving insufficient weight to the interests of investors and consumers in the U.S. market. The treaty obligations the United States negotiates are reciprocal. Critics argue that more attention should be paid to how those obligations constrain the United States as host to foreign investment.

In fact, there was a very vigorous debate on this very issue during the drafting of the Trade Act of 2002 when I was serving as counsel to the Senate Finance Committee. The outcome of that debate was a balancing of the interests of the Untied States as both exporter and importer of investment. The 2002 act calls on negotiators to pursue investment protections similar to those contained in earlier treaties and agreements, but the act also takes account of U.S. defensive interests in several notable respects including the -- the -- the well known "no greater substantive rights" objective, standards with respect to expropriation that Ambassador Larson alluded to earlier, a transparent dispute settlement process, and a dispute settlement process, I would add, that is to deter the filing of frivolous claims.

The message of the 2002 trade act was heard loudly and clearly. The agreements we've negotiated since then have adhered closely to those objectives, and with respect to the question of the day -- should that balance achieved in 2002 be adjusted or disrupted in some way -- I would respectfully submit that the answer is no. As I said, no developments in the intervening seven years suggest any reason to dispense with the balance reflected there.

I would also say, as a former negotiator, that changing those objectives and trying to impose new obligations on our foreign counterparts will be a substantial challenge, perhaps an insurmountable one, leaving U.S. investors without the protections that their foreign competitors receive under other countries' BITs and FTAs.

I'll leave it at that, Mr. Chairman. I see my time is up. I would refer to my written testimony with respect to some of the misunderstandings I referred to earlier.

Thank you.

REP. LEVIN: All right. Professor, if you take five and Ms. Menghetti, if you take five, then we'll go and vote, and we'll come back. Professor, your five minutes.

MR. STUMBERG: Good morning, Mr. Chairman. Congressman Brady, if I may begin with your introduction to the issue, I agree that U.S. negotiators have struck a balance between (the ?) twin mandates -- on the one hand, to protect the interests of American investors abroad, and on the other hand, to ensure that no greater rights go to foreign investors. I also agree that the language of the most recent agreements reflects that kind of compromise. Because it is a compromise, my view is that the United States has not achieved the goal of no greater rights, and I'd like to make three points to explain why.

First, I'd like to talk about the change in countries with which we're negotiating and raise the question as to whether one size fits all -- (inaudible) -- one model for an investment agreement worked in every case. The free trade agreement with Australia shows that one size need not fit all because both countries agree in that agreement that investor-to-state arbitration is not necessary. Why? Because both countries have functioning courts and because both countries have cross investments in each other which if there were investor rights might cause a risk of investor-to-state litigation.

Korea, to me, an agreement that's on the table which may soon come to this Congress, sounds a lot like Australia. It's a country in which there is lots of reciprocal investment going both ways, and both American and Korean courts work. So why is investor-to-straight -- investor-to-state arbitration part of a proposed free trade agreement with Korea?

Another agreement that's on the table with Panama raises interesting questions because the government of Panama, through a variety of banking, tax, and regulatory policies, is recruiting companies to place their domicile -- their corporate domicile -- in Panama to escape taxation and regulation in their home country. Panama has a creative and aggressive legal industry that has recruited to date over 350 foreign companies to establish a domicile in Panama. So essentially what you have is a country that's embarked on a strategy of attracting the kind of companies that would if they could use investor-state arbitration if their interests are affected by policy in the United States.

The United States also began last year negotiations on a bilateral investment treaty, a BIT, with China. Those negotiations are now suspended but China is interesting just because of its size. Presently, there's only about a billion (dollars) of China -- Chinese foreign direct investment in the United States, but as you all know, China has accumulated a humongous surplus in trade with the United States and at some point it's going to start reinvesting that money in more profitable investments, and there's a lot of pressure for China to follow the successful investment path of Japan, which was in a similar position about a decade ago.

If China does so and starts moving billions into the American economy, it's likely to buy assets or shares in American companies that implement its distribution chain. So, for example, that might look like companies like Wal-Mart or -- or Target or Sears, icons of American retail commerce. So if you're thinking long term, anticipating that within 30 or so years China -- Chinese economy is projected to be about the same size as the U.S. economy, you can anticipate that so-called American companies are going to in effect have the benefit potentially of investor-to-state arbitration. So a big chunk of the economy could have the option of opting out of U.S. courts if they wanted to and instead -- (inaudible) -- the investor -- investor benefits.

Let me conclude by referring to a case that's now active and it is rumored to be very close to a decision -- the Glamis Gold case against the United States. It allows me to illustrate the issue of investor rights with respect to two questions -- first, who is a foreign investor. The Glamis Gold Company started as a Canadian company with mines in Canada. It then sold its Canadian assets and established subsidiaries in the United States.

Now its holdings are in the United States, Mexico, Honduras, and Guatemala. So it essentially is a binational company that's able to take advantage of the -- the free trade agreement to bring its claim against the United States. The big issue is the minimum standard of treatment and the big question there is whether a change in the reclamation standards adopted by the State of California amounts to a violation of the agreement.

The United States Department of State argues that a change in the law does not violate the agreement, because the recent language, the movement in the direction of assuring that there are no greater rights, basically says that it is not a denial of justice for the law to change. Glamis, on the other hand, argues that there are plenty of NAFTA cases it can cite to show that the standard of minimum treatment can evolve and should assure a stable regulatory environment, which means the government has a duty not to change the law once a company like them has a mining claimant effect.

So what this shows, in conclusion, is that these agreements allow for a narrow interpretation, one which is argued by the U.S. State Department in its brief, or there are interpretations that allow for a broad reading of the minimum standard of treatment. This is the fundamental ambiguity that exists also with respect to protections from expropriation and protections with respect to national treatment. That's the fundamental ambiguity that's still available, even under the most recent language that our negotiators have crafted.

REP. LEVIN: Thank you very much.

Ms. Menghetti. I think the bell will ring. We have five minutes left, so even though the clock isn't working, the bells are.

MS. MENGHETTI: Thank you, Mr. Chairman, Congressman Brady, members of the subcommittee.

Thank you for the opportunity to appear before you today on behalf of the Emergency Committee for American Trade, ECAT, an association of the chief executives of leading U.S. based business organizations with global operations. Let us make no mistake. U.S. investment overseas is squarely in the U.S. economic and our broader national interests. With 95 percent of the world's consumers and 80 percent of world purchasing power outside the United States, U.S. industries need to be fully engaged internationally to remain competitive.

U.S. investment overseas largely complements U.S. activities here at home. It is not a substitute for them. U.S. companies that invest abroad export more. They expend more on research and development here in the United States, and they pay their U.S. workers 24 percent more than purely domestic companies. In order to secure these benefits, the United States has long undertaken a program to protect investors who oftentimes find themselves in jurisdictions with weak rules and/or weak court systems.

The modern version of this program is the BIT and trade agreement system. The investment protections in these international instruments are based on core principles of U.S. law, from the taking equal protection and due process clauses of our Constitution, to the protection against arbitrary and capricious government actions in the administrative procedure act. U.S. investors have relied upon these provisions to successfully address foreign government action that is discriminatory, expropriatory or otherwise violative of core principles. They have won cases under a number of U.S. BITs including with Argentina, Ecuador, Poland and Turkey, and under NAFTA in cases with Canada and Mexico.

Such provisions are now more important than ever, particularly as some countries, including those in our own hemisphere, are turning their back on basic international obligations and rules of fairness, and they are equally vital as we look to the negotiations with India and China. For U.S. companies to be able to penetrate those markets successfully, we need these types of instruments to address the unfair and discriminatory barriers that we find in those markets. In many more cases, in many more instances, cases are never filed as these fair rules promote the amicable resolution of disputes.

The United States has been a defendant in only a small number of cases. Where decisions have been issued, the United States has prevailed on the merit, in decisions that reflect the high standards for which these arbitration panels are well known. And there has been no onslaught of cases, as some claimed might happen. About 50 cases have been filed in the past 14 years of NAFTA overall. This is less than a third of the cases filed every year in U.S. courts on federal takings claims alone.

Between 2001 and 2004, the U.S. government engaged in an extensive review of the previous 1996 model BIT and considered the same issues we are discussing today.

The outcome, the 2004 model BIT, represented a substantial change from the earlier model, and unfortunately, it narrowed and weakened some of the protections for U.S. investors overseas. Notably, these provisions have not been tested, as no case has been decided on this substantially changed new model. The proposals that are being discussed here today raise some very serious concerns for U.S. industries investing overseas. Further incorporating the no greater rights language, for example, would reverse decades of U.S. support for strong and binding international rules that largely benefit the United States and its investors.

Such an approach would have little effect on challenges to the United States, since these investments protections are already largely consistent with U.S. laws and jurisprudence, and at the direction of Congress, the 2004 model BIT moved the United States to even greater conformity. While the benefit for the United States as a potential defendant is at best minimal, the risk for U.S. companies is great. Other companies will insist on relegating U.S. investors to local standards, negating the purpose of the BIT and subjecting investors to weak and sometimes corrupt legal systems.

On regulatory issues, let us be clear. Investment rules simply do not prohibit the bona fide, nondiscriminatory application of legitimate regulations, and none of these NAFTA cases demonstrate otherwise. I urge you to reject proposals to embrace blanket exceptions, to promote government actions and to protect the environment and public welfare. The United States itself does not impose such exceptions in the administrative procedure act, in the takings clause, in the equal protection, or in our other legal principles.

To establish such a safe harbor would allow foreign governments to expropriate U.S. property to the detriment of U.S. companies and their workers. U.S. leadership is essential to promote a stronger international investment climate, to benefit the U.S. economy, U.S. companies and U.S. workers. ECAT looks forward to working with this committee and the administration to achieve that objective. Thank you.

REP. LEVIN: All right. Thank you very, very much. Unfortunately, as you know, everything is unplanned around here, at most. We have five votes, and one of them is going to be a longer vote, so be patient with us. I think we may take the materials that we have and read them while we have votes, so we'll come back with even sharper questions. So thank you. Your testimony has been really excellent. We'll be back. It will be a half an hour, I think, anyway, maybe longer.

REP. : Forty-five minutes.

REP. LEVIN: Forty-five minutes?

REP. : At least.

REP. LEVIN: Okay.

(Recess.)

REP. LEVIN: (Sounds gavel). Let's reassemble.

I won't apologize because I don't want to apologize for Congressional procedures, but as soon as Mr. Brady arrives. Several of my colleagues told me that they were rearranging their schedules. This was not expected, these five votes. So we'll just wait for Mr. Brady and others will filter in again. We very much appreciate your patience.

REP. : I think Mr. Brady is -- (inaudible).

REP. LEVIN: I saw him. He's coming. (Off mike)

Okay. So we'll start, and others will join us. As we ask questions, let me urge that, to the extent we can, that we focus less on direct foreign investments, the need for it, because it's here to stay in some degree, in a major degree, and more on the structure of investments and how we handle the issues that arise from it. And a number of issues have, and by the way, as we know, the rules have changed in the last years. It isn't as if we're dealing today with the precise language of a number of years ago.

And so I think if we can focus in on the structural issues, the important ones, it will be helpful. And a number of those issues have been raised, and let me just kind of quickly touch on them, and then maybe some of you pick them out and comment. Issues have been raised about the transparency of these tribunals. Issues have been raised about one size fits all, and I think more and more, we've understood that one size doesn't fit all, and issues have been raised, why Australia and not Korea in terms of exclusion of that provision.

Also, an issue has been raised about subsidiaries, as we have more and more a globalized economy, there are going to be more and more subsidiaries of American based companies, and what should be done about that? And also as we discuss this, let me just remind us that, as I said, there have been changes, and in recent agreements, there's been -- (bell sounds)

REP. : They have one more vote that's just been called, Chairman.

REP. LEVIN: Now, this is a total surprise. Let's go on. What's happening is that we now have a controversial issue on the floor. Enough said. That in recent documents, there's been included the provision except in rare circumstances nondiscriminatory regulatory actions by a party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety and the environment, do not constitute indirect appropriations.

That's relatively new language. Plus, the language that some of you have referred to, foreign investors are not hereby accorded greater substantive rights, and I won't read the rest of it because I think you know. So pick out any of those issues. You have varying points of view. Take your pick, and help inform us.

Should we go around the row? Ms. Lee, do you want to pick out any one of the five that have varying positions to them? Yes?

MS. THEA M. LEE: Sure. And let me say that I think there has been movement in the right direction in the 2002 Trade Act, in the 2007 agreement that was reached around the trade agreements and so on, that we're moving in the right direction. And let me just say one thing briefly and let my colleagues come in. The preambular language in the May, 2007 deal that's in the Peru and other pending trade agreements, that asserts that there shall be no greater substantive rights for foreign investors. I guess my question is whether that's sufficient, to state in the preamble that there are no greater substantive rights when you have the language which is very different. Both the procedures and the substance of the investment rights still remain different from what is available to domestic investors.

And I guess I would say, just on the face of it, having the ability to use investor state dispute resolution is a greater right than what a domestic investor would have. And so on, on the face of it, unless we pull that back pretty substantially, that is a greater right and it's in conflict with the preambular language. And I'm not a legal scholar, but I've been trying to read up on all of these issues in terms of the definition of minimum standard of treatment and indirect expropriation, and it seems to me that still does not comport exactly with the takings language in the newest law and that you have a decision that's made by a different group.

It's not being looked at by U.S. courts.

It's being looked at by these international arbitral groups that don't have the same familiarity with U.S. law or the same history and so on. And so, on the face of it, I guess I still think we are at a place where we continue to have both substantive and procedural issues that afford greater rights, whether we state that they shouldn't or not, and that's what I hope we can look at --

REP. LEVIN: Ambassador, why don't you take a pick of any of those issues, or any other issue?

ALAN P. LARSON: Could I say one sentence, about two or three of them?

REP. LEVIN: Sure.

MR. LARSON: Okay. On transparency, as the chairman of the U.S. chapter of Transparency International, I think it's very important and I appreciate the fact that there are two extensive clauses in here about transparency. I hope we can see whether those are adequate. On Annex D, I know from the research that Thea Lee and I will hear from people who think it doesn't go far enough and people who think that it's gone too far. And so that's going to be an interesting part of the work of the panel that she and I will be working on together.

The last comment I'd offer is, Mr. Chairman, on your last one about no greater substantive rights, I think the challenge for U.S. negotiators is that in many U.S. foreign investors in other jurisdictions, we want to obtain greater substantive rights for our investors than domestic investors may have in those countries. That's sort of the value of the BIT. We understand, as negotiators, that we would generally want to offer as little as possible in terms of the substantive benefits that foreign investors might get under a BIT here, but there is fully little tradeoff between what we want for our investors in some other jurisdictions, and what we want to give up, in terms of rights for foreign investors in our country.

REP. LEVIN: Let me just have a quick conference. So we have one vote. Why don't we do this. Mr. Brady, why don't you take over and I'll go, if you don't mind, and I'll have the staff take down your question and the answers, and you kind of take over for five minutes. I'll come back. And why don't you now go and vote, and then you'll be next when you come back. Okay? So, if you don't, is that okay with you?

REP. KEVIN BRADY (R-TX): That's fine.

REP. LEVIN: Okay. And our staff will take down -- (inaudible) -- of your question and also the --

REP. BRADY: Can I pass some legislation while you're away? (Laughter) Not big stuff. It's going to be quick, so --

REP. LEVIN: I think someone would call for a forum.

REP. BRADY: Thanks, Mr. Chairman, very much. Thank you. And again, I thank this panel --

REP. LEVIN: If it takes more than five votes -- (inaudible).

REP. BRADY: I'll be quick. Thanks, Mr. Chairman.

I wanted to visit a little bit about, I think the panel's points have been really well made. A lot of folks rule on the benefits and the improvements that have been made in these provisions over the years. If we could look at the slide panel up there, sort of focusing first on what Ms. Menghetti had to say about the importance of us selling American products and services throughout the world, 95 percent of the consumers live outside the United States. Selling those sales are a huge part of our economy.

This investment provision, in various forms, has been put in place now for more than a quarter of a century. The purpose is to protect our investments overseas. Some of our companies can export from here, but if we wanted Hewlett Packard to compete with computers around the world, Proctor and Gamble with home products, Coca Cola with their beverages, they oftentimes have to compete in that region to either produce or service or maintain their market share. And the investment option has been a protection we have insisted upon to make sure that, in countries that we're in, where their judicial system perhaps isn't as mature as ours, their investment property protections aren't as strong as the United States, we wanted to make sure our investors have the option to pull out and go to that dispute resolution process, that arbitration process, to be in a panel that both parties agree upon.

The panel would create consistent legal framework to resolve these issues. What we find is that the U.S. has used this successfully throughout the years to resolve disputes. California based Metal Clad successfully used NAFTA to challenge issues in Mexico. S.D. Meyers from Ohio, the same with Canada. We've had U.S. companies challenge bilateral investment trade issues in Poland to our benefit, Motorola, in Turkey, Occidental, and in Ecuador, CMS, and Sempron in Argentina, all again using this provision to protect U.S. investors.

But if you look at the number of foreign investors that have used this process to successfully challenge the U.S., you'll see a blank piece of paper, because it hasn't been done. They've brought no lawsuits under our bilateral investment treaties, none under our bilateral FTAs, and 15 to 17 under the NAFTA provision. One of the reasons is because, for a foreign investor, the use of going to the arbitration is somewhat redundant in that they have very strong protections already in U.S. law and the constitution, and when they do challenge it, what they find is, again the U.S. provisions from takings to due process and transparency issues all incorporated in that dispute resolution process, all of which has helped us.

So Ms. Menghetti, do you, the belief that this works against U.S. interests, do you find that to be a credible argument?

MS. MENGHETTI: Congressman Brady, I do not find that to be a credible argument. In the NAFTA cases that have gone forward, and there haven't been that many of them, as I said, compared to what happens every year in a very small area of U.S. jurisprudence, but in all the NAFTA cases, you know, folks might be able to say, I don't like this one statement that the panel said here, or this one statement that they said there. But in all the cases that were decided for investors, if a U.S. court were considering that case, the investor, too, would have won. And that is because the principles in these treaties are very close to, and frankly, based on the principles we have in our own jurisprudence.

In 2004, the model BIT was revised substantially, and in some ways, made things worse, I would argue, for U.S. investors overseas. And we incorporated, and I can't think of any other international agreement that does this, we incorporated directly language from the leading Supreme Court case on indirect expropriation into the text of our expropriation annex. The problem, I think, for U.S. investors is, really, we don't have enough of these instruments.

There are over 2,000 bilateral investment treaties worldwide. The United States is party to about 40 of them, and about 15 more with countries through our FTAs. There are treaties with China, between Germany and the Netherlands, that have investors state and strong protections against expropriation. Our companies don't have that. Many OECD countries have investment treaties with Korea that have investors state. If, as was proposed, we took out investor state from our FTA with Korea, our investors, our businesses, our economy and our workers would be the worse off.

REP. BRADY: So it is a competitiveness issue as well?

MS. MENGHETTI: Absolutely a competitiveness issue.

REP. BRADY: And, that you know, there's been concern raised over the years that this provision could be used to challenge state and local environmental regulations, but, improvements in this. One, that hasn't happened --

MS. MENGHETTI: That has not happened.

REP. BRADY: Successfully. But two, I get the impression that improvements made in 2002 in the Trade Act, and then again May 10 provisions are now parts of our Peru-Panama-Columbia-South Korea free trade agreements.

Mr. Posner, you talked about how those improvements have taken, as its basics, a way to export our constitutional protections and improved even greater upon it over the years. Can you expound? You're always looking for ways to improve provisions in trade agreements.

Have we seen improvement and have they been good for us?

MR. POSNER: Well, I think we have seen improvement, to the extent that you've had a debate on the appropriate balance between protecting the interests of U.S. investors seeking to do business overseas, and the so-called defensive interests, taking account of the risk that the United States might be sued with respect to a regulatory action. So, I see where we are today as an improvement over, say where we are, where we were in 1982, in the sense that we've now had that debate and achieved that balance.

In terms of how would any of the improvements that we've made be interpreted by a panel? What would happen if you had a case that raised, say an indirect expropriation, and the panel had to interpret that annex that a number of people have referred to? How would it do it? What would the conclusion be? Hard to say because we haven't had that case yet, so all we can do at this point is make best guesses based on what I think was our good lawyering, frankly, and our best efforts to accurately reflect the balance that was articulated in the 2002 act, and I think we've done that. So, in that sense, in coming from where we were in 1982 when this program really got going, to where we are today, yes, I think we are improved because we are more balanced.

REP. BRADY: Thank you, Mr. Posner.

Ambassador, there is a concern that foreign investors could use this provision to challenge our state and local environment laws. Yet we've seen states like California, very aggressive on environmental issues, whether it's clean air, toxic pits clean up, water quality control act, health and safety code laws, just in the last number of years, again aggressive environmental actions unchallenged by foreign investors, probably more heavily challenged by U.S. domestic companies that have a different view of it. Do you see the improvements that we've made over the years as eliminating or restricting greatly the possibility that that could occur successfully?

MR. LARSON: Mr. Brady, I was in government at the time that the 2002 trade act was enacted, and the 2004 changes in the model that were made, and so obviously, I was a part of that, and I agreed that they represented a good balance. I've been out of government since then and I know from the preparation that I've done along with my colleague, Thea Lee, that there have continued to be concerns expressed about this issue. There have been concerns expressed on both sides of it, frankly.

And so I'm certain that this will be a part of the deliberative process that we will be co-chairing. I will be very interested in hearing the respective views that get expressed. I'm going to not express a view of my own since I will be co-chairing the process, except to say that it's public record that I was a part of the process that brought us to where we ended up in 2004.

REP. BRADY: Thank you, Ambassador.

Mr. Chairman, I'll run and vote. Thank you.

REP. LEVIN: Thank you very much.

Mr. Doggett is recognized.

REP. LLOYD DOGGETT (D-TX): Thank you, Mr. Chairman.

I have been raising concerns about investment provisions in our foreign trade agreements, I believe, first in this committee in 2001. Modest improvements have been made, but I think your decision to conduct this hearing is constructive, and each of the witnesses who's offered constructive testimony looking at this.

I can say first what I agree with. I agree with Mr. Brady fully in his opening statement that our goal is to help bring other countries up to American standards. Our goal, however, should not be to give foreigners more rights than Americans have, and simply putting it in the preamble, as Ms. Lee noted, is constructive and a big change, but it may not be sufficient by itself.

I think that there are several issues the witnesses have touched on that I will, as time permits, explore. One is the decision of when it is that we decide we need to use these investor panels to protect investment interest. As you noted in your comments, Mr. Chairman, the question of whether we will have foreign investment here or American investment abroad, that's not an issue. I support that concept fully. It is a question of how that investment impacts the ability of states and localities and the federal government to provide meaningful protection to the environment to health and safety.

So the first question that has to be asked, I think -- and I don't believe that USTR has had any real set of guidelines about how to do this -- is whether you need any investment agreement or not. Or whether, as we determined with Australia, that their courts are adequate to handle this. There is, for an example, the decision to include investor panels for Korea. There is a body of case law in this country on forum non-convenience that Korea provides through its judicial system, an adequate forum. And therefore, cases have been dismissed that would be brought here because it's maintained that Korea through its court system provides an adequate system.

Now if I were a trade lawyer, and I had the choice of going to a Korean court or going to a panel of other trade lawyers who that day, instead of being advocates were arbitrators, I'm a guy who would clearly prefer the arbitrator panel. But that doesn't mean that's what's in the best interest of the American public. And so, looking at the way USTR determines whether to have an investment agreement; and whether we have adequate and clear standards as to whether they make that decision is one very important decision.

I think that the changes that have been made in some of the agreements that are now being relied on as a reason not to do any more, are there because a few of us raised these complaints about the lack of transparency. There is some progress that has been made there, but we need to put those rights to make them meaningful. And the fact that the United States has yet to have a ruling against it, I think has to be considered against the backdrop of the fact that the trade lawyers, who are the arbitrators in these panels, are well aware of what the impact would be if the United States did lose a major decision.

Having raised some of those points let me begin Professor Stumberg by asking you about the issue of Panama. I'm pleased that from this witness stand Secretary Geithner endorsed the legislation that Carl Levin and I have to stop tax havens. And my concern is that not only are our taxpayers being fleeced by corporations who buy a mailbox in Panama or some other sandy-beach country. But I'm also concerned about how the subsidiaries of American corporations can be used to launch an assault on decisions that are made by a state legislator -- legislature.

You and others have suggested that these investment provisions could easily be manipulated to use foreign subsidiaries to gain rights that the American corporation wouldn't have if it simply brought a case directly in federal court here. Why should we be concerned about this type of forum shopping by multi-nationals who don't want to file a claim in an American federal court? And is this already happening; and is there a particular concern when it comes to Panama?

MR. STUMBERG: Perhaps it would be helpful to not talk so much theory but to take an example. Panama is controversial because of its banking law, the degree of anonymity or secrecy that financial institutions, or investment banks or hedge funds can maintain in Panama versus the United States. So your concern about subsidiaries I would suggest is best understood when you think about the corporate structures of companies that the U.S. government cares about.

Most of the big banks and financial institutions that are involved in the current financial crisis, and who are sometimes benefiting and sometimes not benefiting from the bailout measures, are both U.S. companies with domiciles in the United States; and they also have subsidiaries in Panama, which they manage for accounting, tax, and other investment purposes.

There is an interesting and disturbing arbitration decision related to financial services that came out of the Czech Republic just two years ago. And that case is still in the process of being litigated the Saluka Case. And in that -- what happened then was in the late '90s, the Czech Republic was coping with a crisis of toxic acids. Ironically, the toxic acids were the result of banks shifting out of the controlled-state, Communist economy.

And so, the government was forced with either letting some institutions fail or bail them out sufficient to maintain, you know, a degree of stability in the system. And so, the Czech government bailed out the so-called big four under the theory that they were too big to fail. And those happened to be the four banks in which the Czech government held the biggest equity stake. Sound familiar?

So a bank which was operating in Czechoslovakia, and which was domiciled in the Netherlands, and owned by a Japanese holding company took advantage of the beef between the Czech Republic and the Netherlands; and brought a claim focusing on the minimum standard of treatment, which includes fair and equitable treatment. And when all was said and done, the ruling was that the Czech Republic had violated the minimum standard because its argument that it needed to implement these bailouts as a prudential measure. Because the banks that it bailed out were too big too fail was not a sufficient objective. It was not a rationale for explaining why it was helping those banks and not the bank owned by the Dutch institution and the Japanese holding company.

And awarded against the Czech government and the amount actually is still in question, I think. The latest I heard was that they were seeking in the range of $3.6 billion crowns. And I haven't converted what a Czech crown is compared to a Euro or a dollar. But that's a real case; and it shows you that subsidiary structures matter, the companies can legally strategize to take advantage of BITs and Free Trade Agreements. And the financial service sector is a huge and looming issue because many investors and many institutions were virtually wiped out. And so how come some get the bailout and some don't?

REP. LEVIN: Okay, your time is up. Let me suggest this that we move on and Mr. McDermott, you're next, I think. But before, if you don't mind, when I went down the row, I skipped the trade -- Mr. Posner, Professor Stumberg and Ms. Menghetti.

Ms. Menghetti, if you don't mind Mr. McDermott, do you want to take 30 seconds just on this issue. And then, we'll come back to you. Just so we have some back and forth.

MS. MENGHETTI: Absolutely, Mr. Chairman. I don't know the precise terms of that treaty, which was not a U.S. BIT, right. I do know that our BIT has very strong requirements and denial of benefits under Article 17 (ph), requiring substantial business activity, requiring, you know, who is the plaintiff in one of these cases. I'd have to look into it a lot further. I don't believe that that type of scenario can happen here.

Two other quick points, though --

REP. LEVIN: Wait, let me suggest this, I don't want to take too much of Mr. McDermott's time right now.

MS. MENGHETTI: Certainly.

REP. LEVIN: We'll come back to that, okay. So you have more -- I just wanted you to have a little time to have some back and forth.

So my colleague, and then Mr. McDermott.

REP. : I assume Mr. Chairman too, you're welcome. And I'd like to hear her other two points, which we don't have time for right now. But they can supplement in writing so that we will have that.

REP. LEVIN: Oh absolutely, absolutely. We're going to see how long you can go and how long we can go. And there may be another vote interrupting us because this is a controversial issue before us, it's the supplemental.

So Mr. McDermott, you're next.

REP. JIM MCDERMOTT (D-WA): Thank you, Mr. Chairman, I guess, having a chance to asks questions.

I'd like to ask the panel, is it right to assume that only investors have a private right of action?

Yes Mr. Posner.

MR. POSNER: Yes, there is a threshold -- there are certain threshold questions in investor state - (inaudible). To be a claimant, that is to be able to bring a claim to arbitration, you have to be an investor of a party. You have to have an investment in the territory of the other party; or in some cases, we have what is known pre-establishment rights. So if you sought to make an investment, you made every effort, but you were kept out of the market because of discriminatory treatment on the part of the other government. You might be able to bring your claim with respect to that pre- establishment phase.

But the short answer to your question is yes. You have to be an investor or somebody who is seeking to make an investment; and is being blocked in order to go to arbitration.

REP. MCDERMOTT: Ms. Lee.

MS. LEE: I think that's a very important question. And I would disagree that it's obvious on the face of it that only investors should have private right of action. I think if you look at the trade agreement it is -- investors have a privilege that no other group, not a union, not a non-governmental organization has to challenge whether the other party to the agreement is living up to its obligations or not.

You know, we've talked a lot about whether unions, for example, should have the right to sue another government if they are not in compliance with the labor chapter. But we would have to -- the opportunity to bypass our own government. We wouldn't have to convince our government to bring that case. Everything else in the trade agreement is adjudicated on a government-to-government basis. And I think it creates a huge imbalance in the trade agreement certainly that you give one group private investors the right to sue.

I think even in the context of the Bilateral Investment Treaty, I think it creates an imbalance between private companies and government. Governments have an obligation to protect the interests of their members; they have a democratic process for determining the level of regulation, whether it's public health or the environment. And to give an individual company the right to sue and to create a tax liability is an enormous step. And one that I think should be rethought.

MS. MENGHETTI: Congressman McDermott?

REP. MCDERMOTT: Yes.

MS. MENGHETTI: If I could just make one -- two points about that. One is an investor should not be thought of as a business. So an organization that goes overseas and opens an office for other purposes, and invest capital in that country, could be an investor. And the other point I would make is, it is very interesting that investor-state dispute settlement we see it under our BIT now our FTAs. We also see it in agreements at say the World Wildlife Fund and environmental, non-governmental organizations have with foreign governments in tropical timber conservation where there is a debt swap and the governments make certain commitments.

Those international -- those environmental organizations have fought precisely these rights in those areas as well. And so, it's not something, I think, just confined to investors. But investors, the reason you have investor state as opposed to any other parts of the broader FTA is the investor is overseas. They are subjecting themselves to a foreign government's activities and actions, no other actor, if you're not an investor is put in the same place.

REP. MCDERMOTT: The reason I asked the question is that I remember we've been going around and around on this issue for some period of time. And the most classic case was -- that I remember was the gasoline additive produced by a Canadian company in which they sued the state of California for their law that said they couldn't have it any more. And they won.

And -- are we in that same place - (inaudible) - not win?

MS. MENGHETTI: The U.S. government won that case, the Methanex Case.

REP. MCDERMOTT: And the Canadian firm --

MS. MENGHETTI: The Canadian firm lost. And in fact, the Canadian firm had to pay damages to the U.S. government.

REP. MCDERMOTT: And who was it that gave the evidence? Did they just defend the right of California to protect the common good?

MS. MENGHETTI: I believe it was the Office of -- the Department of State, the legal advisor's office which did the defense.

MR. : That's right, I mean, it's -- in any of these cases, whether it involved a measure of the U.S. federal government or a state government or a local government, it is the United States; and in particular, the legal advisor's office within the Department of State that defends the measure. I could elaborate on that more, but it goes to a point that I think Mr. Brady alluded to earlier, which is, when you go to arbitration, the only remedy you can seek is damages, money damages.

So, it's not as if in the Methanex Case, to use that as an example, the Canadian investor in that state could have sought to compel California to do something that it didn't want to otherwise do in the interest of regulating on behalf of the consumers of California. The most that Methanex could have gotten if it had won, which it did not, was money damages from the U.S. government.

MS. LEE: A billion dollars which could be a pretty significant deterrent.

REP. MCDERMOTT: And that same thing then could be happening with our bailout money to banks; if there are some creative lawyers in some countries we may wind up our $700 billion bailout of our banks.

Mr. Stumberg.

MS. MENGHETTI: I think that is not the case. I mean, in 2004 one of the very big innovations put into our model BIT was this prudential carve out. And that governments can have the right to take measures precisely financial measures if they need to for financial reasons. The bailout that we've seen, the TARP, has not been discriminatory. I don't see any obligation that is even close to being violated by anything that our government has done.

MR. STUMBERG: The question about the prudential carve out, was raised in Ambassador Kirk's confirmation hearing. It's a two-sentence exception. The first sentence says nothing in the agreement should stop a government from taking prudential measures. The second sentence says the governments may not take advantage of the exception if to do so would avoid their obligations under the agreement. It appears to be self-canceling or perhaps it creates a burden of proof in favor of the investor against the government.

But that's the kind of question I'm trying to raise to your attention where -- I'm not arguing that there shouldn't be investor protections. I'm saying that these are very complex agreements. We learn as we go. And every time we anticipate a new factual scenario, we should take advantage of it. We should be prudent and manage future risks; and do things like tighten the screws on that prudential exception. If you want a good model for one, go back to NAFTA. NAFTA has a one-sentence, prudential exception; and it says governments may take prudential measures. And that will not be a violation of this agreement.

There are hundreds of billions of losses, as you know, in the U.S. financial markets. And there is a great deal of de facto, unintentional picking and choosing going on between institutions. We have no idea what the potential upside of our liabilities are in that respect.

REP. LEVIN: Mr. McDermott, I think we will turn it over to Mr. Etheridge and then we can come back.

Mr. Etheridge.

REP. BOB ETHERIDGE (D-NC): Mr. Chairman, thank you. And let me thank you all for spending your time here this morning. I know it's been a long morning and I appreciate it.

Mr. Posner, let me ask you a question since you have -- as someone who has worked at the corporate level as well as having been at the staff level, you have a little bit more of a unique perspective. And then, I'll ask the others to comment. And my question is are there specific changes that you would recommend to our FTAs and BITs that would provide legal certainty and facilitate investment that would help provide economic growth to American companies, the companies here in the United States?

MR. POSNER: I think that the short answer is no. I think what you have in our current model is a core set of protections that Ambassador Larson alluded to earlier. When the U.S. investor goes overseas, sets up shop in the territory of another country, really these are the main protections.

This is the essence of what it's looking for in its relationship with that other country. It wants to know that it won't be discriminated against. It wants to know that if its property is taken that it will be compensated promptly, effectively and adequately. It wants to know that it will be entitled to a certain minimum standard of treatment.

So I think those core elements have been there since 1982; they continue to be there. What we've done in the intervening 27 years is to make certain adjustments. I would say at the margin to start to take into account the fact that as we enter into these agreements with bigger economies, with economies that are making investments in the United States; there is a possibility we might be sued. And there has been more thought given to how we would respond to that.

So the short answer to your question Mr. Etheridge is no I can't think of any change that I would make. I would, if I can sort of just tack on one sentence in response to Professor Stumberg's point with respect to the prudential exception and financial services. In fact, it's not a one sentence exception. There is an entire page that sets out a special procedure where financial regulators of the two countries that are parties get together and work through these issues; the same way they would if there were a complaint made with respect to a tax measure.

So if a country were challenging a tax of the United States or Peru or Chile or whatever other country, and said that's expropriatory (ph) there would actually be a dialogue that takes place between taxing authorities to sort that issue out before you even ever got to a panel, the same with prudential - (inaudible). So it illustrates the point, I think, that we have a good balance. I can't think of anything that I would change because I think if you did, you would move in one direction or the other that would really disrupt the balance and crater the program.

REP. ETHERIDGE: Anyone else?

MR. : Sure, if I could respond. Hopefully, there is always that kind of dialogue in investor to state dispute. And the procedures require the parties to try to get together and work out a pragmatic or practical solution first. In this case, what the investment chapter requires is that that dialogue must include the taxing authorities or the prudential authorities in the country.

If they don't agree, then the case still goes forward to an arbitration panel. So Ted is right to point out the fact that there is built in dialogue here, but it is part and parcel of the usual process. It's just much more explicit - (inaudible).

REP. ETHERIDGE: Ms. Lee.

MS. LEE: Mr. Etheridge, in answer to your question about whether there are any reforms, I actually think there is a short list on the last page of the -- page five of Professor Stumberg's testimony that I think is a good summary of the areas whether you would want to look into where there are some suggestions for how you would narrow the -- some of the definitions and the standards and clarify where the language is unclear. Where the language has been interpreted differently by different dispute panels over the years that I think we've put ourselves in a vulnerable position where we are hoping that the dispute panel will decide in a certain direction; and that they will take one pack over another.

But that we have something as important as this issue which affects both the United States as well as the outward investment. And from our point of view affects, you know, unions and our brothers and sisters in other countries, in developing countries as well. That we should narrow the language so it says exactly what we want it to; and we won't have this problem of different interpretations, or hoping for the best out of a dispute panel because we will have clarified that language.

REP. ETHERIDGE: Mr. Larson.

AMB. LARSON: Very briefly. I tend to the view that these issues have been thought through very, very carefully. So I don't want to give the impression that what we have now has -- is necessarily bad. I do think that we have been assigned to have a look and see if it can be made better. We need to do that.

One area that certainly is different today -- looks different today than it did five years ago is financial services, and the whole issue of safety and soundness. And you can look at it from two perspectives. One is there is more regulation and more attention on what governments ought to do to ensure safety and soundness of institutions. That's for sure.

There is also a very clear recognition, I think, that investment from abroad has been a very important contributor to the ability of our financial system to respond to the crises that - (inaudible) - faced over the last years. So we have work to do. I just don't have a preconceived answer to your question.

MS. MENGHETTI: If I might. I tend to agree with my colleague Mr. Posner that we don't need to see new improvements. I'm happy to discuss them. I think they always should be discussed. I am quite alarmed in fact by the proposals made at the end of Professor Stumberg's testimony, which I've just been looking at. And with the committee's permission, I would probably like to submit something for the record on those.

What I think we really need is more of these treaties. We have over -- there are over 2,000 of these BITs around the world. The United States is party to about 40 and about 15 -- with 15 countries in our FTAs. The United Kingdom, Germany, others have very strong BITs; and they have them with countries like Korea with investor states. Germany and the Netherlands have a BIT with China that has strong expropriation standards and investor states. Our companies, our economy and our workers are losing the competitive battle with the lack of more BITs that we don't have.

REP. ETHERIDGE: Thank you, Mr. Chairman. I yield back.

REP. LEVIN: Mr. Pomeroy.

REP. EARL POMEROY (D-ND): Mr. Chairman, thank you for this hearing; and I apologize for missing so much of it in light of conflicts that I just simply couldn't avoid. The inquiry I believe is so extremely important because this notion that the way we've been doing trade is the way we will do trade going forward, bring on the next trade deal, would be a very erroneous notion relative to the feeling across the country and certainly the feeling in this Congress.

And so, since this kind of inquiry what were the soft spots in trade deals? How do we make certain that legitimate questions that people have about the wisdom of what we've done are being addressed? And how can we make sure we don't repeat errors going forward? All of this is extremely important inquiry.

Having missed most of the entire hearing, I'm not going to ask questions that have probably been covered already. I will -- I intend to review the statements. And again, appreciate very much your leadership on this panel. And I hope with the spirit of bipartisan accord, we can continue this type of inquiry. I think it's very, very important to the institution we represent on trade. Thank you.

REP. LEVIN: Well thank you.

Let me just ask do you have a few more minutes? I mean, you've been very patient and willing. I think the importance of this subject and also the spirit expressed by Mr. Pomeroy, which I think you know is very much mine, makes it I think useful if we spend a few more minutes. Okay.

Mr. Brady, do you have anything further?

REP. BRADY: Sure, just again, Mr. Chairman thanks for holding this hearing. I do think it is important for us to be looking for ways to improve issues. This provision has proven to be very helpful to our ability to sell U.S. products overseas, to sell our services. And it has been, I think, critical in attracting investment, and just like a country -- a company, you'd rather be one that people want to invest in than a country you don't. And this has been critical in attracting investment that supports five million U.S. jobs, also critical.

I want to address a couple of points that have been raised very thoughtfully by our members. One is that the concern that in Panama or any place that some shell company could locate there and then bring a cause of action against their or U.S. law. Up on the screen is the language from the Panama Trade Promotion Agreement that deals with this issue. And basically it says to the point if the enterprise has no substantial business activities in that territory other than just owning or controlling, that their benefits may be denied under this chapter.

In other words, the shell company I guess could file a claim, but not very likely to succeed. There have been concerns perhaps a foreign company could locate in the U.S., again use a shell company or otherwise. And challenge our U.S. environmental state and local environmental regulations. But also, again because of improvements to the provision language in our agreements and investment treaties say quote, "Except in rare circumstances, non-discriminatory, regulatory actions by part of the design and applied to protect legitimate public welfare objectives such as public health, safety and environment do not constitute indirect expropriation."

Again, we took efforts and actions to limit the likelihood that that would occur. So I think some of these issues had been addressed and been proven to be good improvements to this provision. But I wanted to ask Mr. Posner, I guess, because you raised it in testimony. You talked about the balance that as we provide and seek greater protections for our ability to sell American products throughout the world, that reciprocity exists; so we have to weight that balance against the rights that are provided in a reciprocal trade agreement.

Can you talk since you were so instrumental in the 2002 improvement, can you talk a little about that? Because I actually think that's an area we don't spend much time thinking about in this provision.

MR. POSNER: Sure. Going back to 2001, 2002 you had started to see more and more claims against the United States under NAFTA. You saw the Methanex claim that Congressman McDermott alluded to earlier. There was a claim involving an infrastructure project in Massachusetts. There was the Lowan (ph) case, the so-called Mississippi funeral home case. You had a number of cases, which caused observers of these agreements to think more closely about what happens when the United States is sued. Are we adequately protected?

In response to that concern, we did a number of things. One is with respect to expropriation and the Annex that some people have referred to. There was a concern that an investor-state arbitration tribunal might interpret the concept of expropriation in a more expansive way than a U.S. court would interpret the concept, the parallel concept of taking.

To ensure that that did not happen, as Ms. Menghetti referred to, we created this Annex. And in drafting that Annex, what we did was we went back to the Seminole Supreme Court cases in the area of regulatory taking.

The famous Penn Central Case, which many are familiar with, we looked at the factors that the U.S. Supreme Court and lower courts look to in determining whether a regulatory action constitutes a taking.

We drew on those principles and put them into the Annex. So I think that was one very important thing that we did. We also were mindful of the fact that in a sense there is a connection between risks of being sued and transparency. We thought if the process is more transparent, stakeholders will become familiar and more comfortable with it. They won't see this as some star chamber that is deciding things in an untoward way. We insisted upon transparency.

That's now become a cornerstone of our investor-state processes. There was also a question back in 2001 about the meaning of the so- called minimum standard of treatment. In particular, there was a concern that an arbitration panel would take a concept like fair and equitable treatment and say, well that's an entirely subjective concept, a standard-less concept. I can decide; I as arbitrator can decide what it means.

There's a concept in the world of international arbitration that goes by the Latin term ex aequo et bono, that an arbitrator can decide, based on what it thinks is fair; and there was a concern that panels would take that provision in U.S. treaties and interpret it in that way.

So we closed that door by saying, no, you interpret that concept in accordance with the customary international law of minimum standard of treatment. And there's a very well-developed law over a century old on what that concept means. Those were sort of the main features that we put in there in recognition of precisely the concerns that you have identified.

Thank you.

REP. BRADY: Okay. Mr. Chairman, the only problem with the last question was that I think it is important to keep improving our agreements at every shot. And also, it's important not to sort of fall to the temptation that everything before us is bad. There's been good improvements in this provision that we ought to embrace as we walk forward.

REP. LEVIN: Okay, then, as I turn to colleagues, the language that we now regard in shell is there. I think an issue has been raised here, and perhaps the subcommittee will consider this, of where the entity in another country is not a shell. And this is going to occur more and more during globalization, right? Where you have a subsidiary that isn't a shell, but a real thing.

And I think the question becomes, does that subsidiary, which let's assume is a true subsidiary, it doesn't call all the shots, you know, etcetera, etcetera. Would it have access to an arbitration panel which would not be true otherwise of its home corporation? That's a different issue, is it not, then? And Ted, Mr. Posner, do you want to?

MR. POSNER: Yeah, I'll just say briefly. First of all, the denial of benefits article which Congressman Brady has distributed and put up on the screen, that's one half of the picture. So you can't -- a mere shell could not bring a case against the United States. We all agree on that.

Your question, Mr. Chairman, if it had substantial business activity in the other country could it bring a claim? And the answer is, yes, if it's bringing a claim with respect to an investment that it has made in the United States.

So if you had a situation, take a big U.S. Corporation, that establishes a small subsidiary in Panama or some other country. The mere fact of its having substantial business activity in the territory of that other country is not enough for it to bring just any claim against the United States. It would have to bring a claim with respect to an investment that it owns in the United States, that it, the foreign subsidiary owns.

That's a pretty high bar. The prospect of a company arranging its business dealings on the possibility that one day it might want to bring a claim against the United States with respect to an investment that its subsidiary owns in the United States, I find rather implausible.

REP. LEVIN: Let's hear Professor Stumberg, and then I'll turn to my colleagues. Yes.

(Cross talk.)

By the way, this is why we're having this hearing. To raise these issues and have the responses.

Professor, take a minute, and then I'll turn it to one of my colleagues.

MR. STUMBERG: Well to my colleague, Mr. Posner, I would say, the law school I went to taught me that one of the lawyer's chief roles is to help one's corporate clients structure their operations, to create an architecture that takes advantage of a complex array of legal features. Tax law, corporate law, environmental and economic regulation.

The state of Delaware is a living monument in the United States to the legal imagination and how frequently lawyers do in fact help their clients structure the architecture of which subsidiary is incorporated where, to take advantage of legal opportunities.

REP. LEVIN: At this point, is there an example, I guess?

MS. MENGHETTI: Could I?

REP. LEVIN: Yes.

MS. MENGHETTI: I was going to suggest that the example is this: We have an over 20-year-old bilateral investment treaty with Panama. We've never seen this case. We've never seen that type of structuring that Mr. Posner described would have to happen to come within the treaty -- (cross talk) --

REP. LEVIN: How about other places than Panama. Has that happened?

MS. MENGHETTI: Not against the United States it hasn't. And that is probably a significant part. Because the United States has such a good legal system.

REP. LEVIN: All right. Mr. Doggett, you're next.

REP. LLOYD DOGGETT (D-TX): Thank you very much, Mr. Chairman.

Ambassador Larson, the joint committee you have seems to me to be a constructive step forward in trying to address some of the concerns that I have. Even though we may have a somewhat different perspective about how far reaching those are, do you have a feeling at this point as to when you will have any kind of report that the committee might benefit from?

MR. LARSON: Not as specific, Congressman, as I'd like to be able to give you today. Ms. Lee and I, we had a conversation the last couple of days with representatives of the government, USTR and the State Department. We, I think we have collectively agreed that she and I and the government need to sit down and map out the next steps.

We want to hear those issues that the executive branch thinks are very high on their list. We've heard a lot out of the conversation today, and I'd like to thank the chairman for the opportunity to, you know, get this input to our work. One of the things we have to talk about is timetable. I know that there's a hope that this could be expeditious, but we also know that these are thorny issues, and --

REP. DOGGETT: I suppose it doesn't have to be all at once. You may resolve some issues without resolving all issues. And so, hearing from you, I would just say would be constructive. The kind of conversation with the differing perspectives that you and Ms. Lee have in addressing these issues is very much the kind of conversation that I think the chairman is facilitating in this committee for the first time, not just the first time today, but trying to get a discussion of what a more modern trade policy would look like.

And I would ask you, Ms. Lee, as you do that, to look at this issue of when it's appropriate as a preliminary matter to have an investor tribunal of this type. It is appropriate in some circumstances. Despite the questions that I have about it I would hate to be investing in some countries if I had to rely just on their local courts.

But I think that USTR in the past under Democratic and Republication administrations has had a tendency to just listen to whoever might have a business claim there or the fraternity of trade lawyers, and not consider the broader issues, and I think we need to look at the form non-convenience law and in other considerations to determine what's appropriate.

Ms. Menghetti, I hope you will give a full critique of what Professor Stumberg is talking about because I can see issues with some of these, and some of them are somewhat appealing to me as ways to try to address this. And I want to ask you Professor Stumberg about one of those.

I know there was a time in this country, in fact it concerned President Roosevelt a great deal, that you know it was viewed as a taking of a company's profits if you had a child labor law or if you set minimum standards for how many hours a week someone had to work. No one is suggesting that we are going back to those kinds of conditions on those issues, but decisions of the courts of the '30s and the '20s and substantive due process are very different, though there are certainly jurists in recent times who have urged that point of view.

What does it mean to say that you believe we should follow the position of U.S. brief in Glamis, with reference to minimum standard?

MR. STUMBERG: Well it's about due process. There are two flavors of due process, going back to the Supreme Court cases before 1934. One flavor that is alive and robust today is procedural due process. The basic ideas of fairness in courts and agencies, the now obsolete notion in terms of U.S. Constitutional law is called substantive due process by which the courts put themselves in a position to second guess and overturn legislation. And the Lockner case you referred to was about workers' hours.

It is substantive due process which was the mechanism used by the arbitrators in the investment, in the financial services case, the Saluka case that came down two years ago out of the Czech Republic. That's why I'm concerned that the DNA of substantive due process is alive and well and arbitrators are using it to second guess the policy determinations of national governments in terms of how to manage their bail-out strategies, and which economic emergency measures are appropriate.

REP. DOGGETT: Thank you, and I hope you will flush out your specific proposals, just as Ms. Menghetti would give the critique of it. And I would just say in closing, Mr. Chairman, thank you for again for doing this. I think when the Congress approves an investor state tribunal, we are making a decision that our open federal justice system is not the appropriate form, that we need to move to an unelected tribunal to do it. It has great potential consequences for the taxpayer, who might ultimately be called on to fund one of these judgments, and has great potential for harm to the ability of our governments to enact reasonable environmental health and safety laws.

That has to be considered in balancing it against the need to protect our investors at home and abroad, and I think today's hearing takes us a step forward in trying to reach a reasonable balance.

Thank you very much.

REP. LEVIN: I assume of course one dilemma we face is if we insist on a tribunal in terms of actions of another country, can we insist that they use our courts? And, we've thrashed, we've talked about these kinds of issues, and we did in terms of worker rights provisions, if I might say so, where we insisted that there be parity.

And so you raise an important issue, but I think we need to look at it as I know you'll agree, kind of in a well-rounded way.

Well are we done?

Mr. McDermott.

REP. MCDERMOTT: Mr. Chairman, I know you all see those cameras up there on the wall, behind us -- (laughter) -- and for those people who are watching this, it looks like a pretty arcane subject. (Laughter.) And I'm not a lawyer, and I'm not a banker, and I'm not involved in international trade, but what I'm interested in is that members of Congress have the opportunity to establish good public policy and then not have it taken away by some trade agreement or arbitrary group of tribunals some place.

So, Mr. Stumberg, I would like at least your observation as to what you think is the most protective of the public common good that we could do in these laws to change, alter -- I understand money is important. I mean, God knows we can't do without money, right? But money does not necessarily, in my view, trump the common good.

So I want a system of trade agreements that does not trump the common good, whether it's in Honduras or the United States. And I would like to hear from you what you think we ought to do with this issue.

MR. STUMBERG: Well let me limit my answer to two, the two most important investor protections. And recall earlier when we were talking about America's defense team and the offense team. The defense team is a crack squad of lawyers at the U.S. State Department, and they successfully defended the California measures in the Methanex case, which we should all celebrate.

My radical proposal, and that's for improving --

REP. MCDERMOTT: -- Let me just stop you right there. One thing on that bunch, on the defense side.

MR. STUMBERG: Yes.

REP. MCDERMOTT: Have there been things done in the last administration to weaken that division of the State Department and their ability to protect the common good?

MR. STUMBERG: Not to my knowledge.

REP. MCDERMOTT: No.

MR. STUMBERG: They are health and thriving.

REP. MCDERMOTT: Okay.

MR. STUMBERG: And they won the Methanex case, and they got the following one sentence conclusion about the scope of expropriation. May I read it to you? I'm proposing this as yet a further improvement.

"It's a matter of general international law, a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and which affects the foreign investor, is not deemed an expropriation." That is more protective of the public interest than even the crafted language that Mr. Posner was talking about before. I would submit that idea as the best the State Department's lawyers may have accomplished in terms of the high-water mark of clarity in an arbitral decision.

And then with respect to the other investor protection, the minimum standard of treatment, the so-called substantive due process issue, the brief of the State Department's lawyers in the Glamis case, the one that's coming to a conclusion, is a masterpiece. Unfortunately, it's a long masterpiece. But if you look at page 221, you will see that --

REP. MCDERMOTT: It is long.

MR. STUMBERG: You will see that definition --

REP. MCDERMOTT: -- I'll have my staff write down, 221.

(Laughter.)

MR. STUMBERG: And I'll read it for you. The customary international law treatment of aliens, which the State Department lawyers have in scholarly fashion, illuminated in such a way that it is a logical, tight, clear and unambiguous definition of what that means. It is tighter, more clear, and less risky than even the improved language in the draft Panama and Colombia, excuse me, creative free trade agreements.

So I would submit that page 221 of the brief of the State Department is the United State's lawyer's best guidance on how to clarify this investor protection.

REP. MCDERMOTT: Anyone else want to make a quick comment? You got a minute? Ms. Lee?

MS. LEE: I just wanted to make a quick comment about the broad issue here. And I certainly understand from the point of view of American companies that they want the strongest possible protections when they go overseas. And I sympathize with that. But I also think it's important that we clarify that the interests of the United States are not entirely synonymous with the interests of the U.S. multinational corporations.

And particularly when I talk about my members, working people, that the outward foreign direct investment in many cases, not every case, but many cases, is about taking our jobs and moving them to another country, and then seeking the kinds of protections in that country that they would have had if they'd stayed home in the United States of America.

And so I think it's not an irrelevant issue. It's not an arcane issue for our members. This is the intersection of trade and investment. It's all about globalization and outsourcing and offshoring and who is taking care of workers and communities and the environment back home.

And we care also, as you do I know, about whether this is good governance for developing countries. Whether they are giving up too many rights because the corporations in the United States are so powerful and have the best lawyers and good teams, and they can afford -- they have deep pockets. They can bring these cases to challenge for example in Mexico, Metalclad challenged the N-1, the Mexican government's decision not to give them the permits to handle toxic waste disposal in a place where they thought it wasn't environmentally appropriate.

And so, I think the issues are tremendously important, and I just wanted to reiterate. We talk about competitiveness of U.S. companies, but that issue, it's not just saying the profitability of U.S. companies operating abroad as the competitiveness, the ability of U.S. companies who are operating on American soil to survive and thrive in the global economy. And we just need to remind ourselves what the ultimate goal is of our trade and investment policy. That it's not to have more trade and investment for the sake of it, it's to make sure that trade and investment is serving the social goals.

Thank you.

REP. MCDERMOTT: I yield back the balance of my time.

REP. LEVIN: Mr. Herger.

REP. WALLY HERGER (R-CA): Thank you, Mr. Chairman.

Ms. Menghetti, we frequently hear the allegation that U.S. companies that have investments abroad have somehow turned their back on the United States in search of low-cost labor and other weak regulatory standards. I'm pleased that some of my colleagues have joined me today in pushing back on that notion. The facts simply tell a different story.

Foreign operations complement U.S. operations. One particular fact that caught my eye is that the overwhelming majority of existing outbound U.S.-foreign direct investment goes to develop country markets, like Europe and Canada that have strong labor protections. Right now only 1 percent of U.S. foreign investment goes to China, for example. Ms. Menghetti, how does the fact that most U.S. investment is in high-wage countries reconcile with the perception that some people have that this investment is simply offshoring American jobs to low-wage countries in search of increased profit?

MS. MENGHETTI: I think it absolutely contradicts that type of allegation about outsourcing. As you indicated, most U.S. investment abroad is in high-wage countries. When companies go overseas to invest they do so for many many reasons. They do so in primary part to be able to access the 95 percent of the consumers outside of the United States and those with the greatest purchasing power. And those are in the highest-wage countries.

I believe Congressman Brady said, at the outset, the very striking statistic that the output of U.S. subsidiaries overseas, the vast majority of it, over three-quarters of it, goes, stays outside the United States. Oh, actually it's much higher than that. It's 95 percent of the U.S. output of U.S. subsidiaries overseas stays overseas. About 5 to 7 percent comes back to the United States.

This isn't about outsourcing. This is about making the U.S. economy, U.S. industries, and our U.S. workers stronger. I have companies who tell me that their U.S. employees -- one dollar out of every four that they pay their U.S. employees is because of their overseas operations.

Overall, for U.S. companies that are globally engaged, about half of all their income comes from their operations overseas. Foreign investment strengthens U.S. companies. It strengthens U.S. economy and provides very good-paying jobs for U.S. workers and strengthens the ability of companies to have those workers here in the United States.

REP. HERGER: Thank you, and Ms. Menghetti, in your testimony, you talked about how important it is for the U.S. service sector to be able to establish foreign operations to serve customers in those markets. That statement seems to reconcile data I've seen from the Commerce Department that shows that virtually all the growth in the employment of U.S. companies' foreign operations has been in sectors other than manufacturing. Would you agree with that conclusion?

MS. MENGHETTI: I absolutely would, Congressman. For U.S. service suppliers, the vast majority of their sales have to be sales from their overseas subsidiaries to the local market. There's very little cross -- there's some cross border services sales, but most of it is affiliate operations. You can't provide banking services. You can't provide other services sitting here in the United States, for the most part. And that is exactly why the United States service sector, one of our most vibrant sectors, has really been able to benefit from overseas investment.

And that helps us back here in the United States. Because a lot of the basic documents that those service providers use in their overseas markets, policies, manuals, and other research and development, that still stays back here in the United States and grows the U.S. companies back here home as well.

REP. HERGER: Thank you very much for your testimony. This is very important. It's so easy to get caught up on the thought that these issues are hurting our economy when in essence, we need to be encouraging this type of efforts and investment because it ultimately helps us and helps our workers, and helps the U.S. economy. So thank you very much, and Mr. Chairman, I yield back.

REP. LEVIN: Okay, I'll resist the temptation to comment on that, because my plea is that we try to look at various sides of an issue. I think, Mr. Herger, when you say ultimately it benefits. It doesn't always. And this isn't a hearing on manufacturing, but if it were I think I could give you some very prime examples of where it's more complicated than that.

And we're going to be in the manufacturing area in the next days, discussing the very issue of the interaction of globalization and how it works out for people who work here. And so, indeed I think the thrust of this hearing is to -- and it's been I think extremely, very useful -- is to try to take a fresh and a well-rounded view of these issues.

And Ms. Lee and Mr. Ambassador Larson, you're not charged to carry that on. And we wanted to have this hearing in part so we could provide input, and in part because we want there to be a lot of interaction in the days ahead.

So, Ms. Menghetti, you're going to send us some further material. I think Professor Stumberg, you've been asked by Mr. Doggett to send some further material. And the others of you, if you would like to do that, do so. I think in the case of the Ambassador and Ms. Lee, you probably will refrain from that as you undertake your responsibilities, and we're hopeful that you will, as you say, proceed expeditiously.

Well I want to thank my colleague the ranking member and my colleagues on all sides. This, I think, has set as an example the kind of approach of hearings we're going to have as we craft a comprehensive new trade policy for the United States of America.

Thank you very much. We are now adjourned.

END.

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