Last Friday was a sad day for Guatemalans, a day that unveiled the merits ruling on the first investor-state case brought under CAFTA. The case, Guatemala vs. Railroad Development Corporation (RDC), produced an $11.3 million judgment in favor of Pittsburgh-based RDC and against Guatemala, which has the second-lowest human development index in the Western Hemisphere. The decision of the ICSID-hosted tribunal not only sacked the Guatemalan government with a fine equivalent to its health care provision for over 160,000 Guatemalans, but created a precedent that threatens to breach sovereignty and curtail policy space throughout Central America.
The dispute between the RDC and the Guatemalan government arose over RDC’s operation of Guatemala’s railway system. In 1997, RDC won a government contract to operate the country’s newly-privatized rails for 50 years (para. 30). For the following decade, RDC reopened several defunct rail lines, but did not restore the rail network to the extent the government had envisioned. In particular, it started but did not finish a planned corridor to link Guatemala with Mexico. (It seems that RDC’s sluggish investment stemmed from sub-par financial performance—in its first eight years, the company was not able to turn a profit on its Guatemala operations, a fact that the tribunal acknowledged—see para. 269.)
After months of negotiations with RDC failed to produce results, in August 2006, Guatemala’s executive branch declared RDC’s contract to be lesivo—or injurious to the interests of the State. The lesivo is a legal carve-out for the executive branch that has existed on the books for decades in several Latin American countries. In Guatemala, an executive declaration of lesivo initiates a legal process in which an administrative court weighs the executive branch’s accusations against the defense of the investor, which has the right to appeal the resulting decision to the Supreme Court (para. 91). Yet, RDC argued before the ICSID tribunal that the lesivo declaration itself gravely tarnished the company’s image, causing it to lose business contracts, lines of credit, potential investors, and even police protection (para. 124). While defending itself in Guatemala’s lesivo-prompted administrative court process, RDC opted to also sue the government under CAFTA to the tune of $64 million for having used the lesivo.
In the suit, RDC accused Guatemala of three trade “crimes” forbidden by CAFTA: indirect expropriation of RDC’s investment, national treatment (such as for favoritism for domestic over foreign investors), and failure to afford the company a “minimum standard of treatment.” The ICSID tribunal nixed the first two accusations as baseless, but upheld the third as sufficient cause for slapping Guatemalan taxpayers with an $11.3 million blow.
Before delving into RDC’s accusations, it’s worth underscoring the radical nature of the entire investor-state dispute mechanism enshrined in CAFTA and employed in this case. Here, CAFTA’s investment chapter has granted authority to a trade tribunal—three unelected men from foreign countries—to determine the legitimacy of a sovereign government’s contracts. Governments sign contracts for all manner of public purposes, including the provision of essential infrastructure, such as railways. Should foreign tribunals be permitted to rule on the validity of such public contracting, or to fine the government millions of dollars when they opine against its practices? The answer of course has been an adamant “no” from activists, scholars, and governmental representatives seeking to defend democracy and the public interest.
However, it now appears that US trade negotiators intend to mimic such sovereignty-breaching investor protectionism via the Trans-Pacific Partnership (TPP). The leaking of the TPP’s investment chapter last month sparked outrage when it revealed that the TPP would permit foreign corporations to directly sue the US and other participating governments over contract claims, once again to be decided by a foreign tribunal. (The U.S. appears to be pushing especially hard in this respect, such as by insisting that “investment agreements” with governments be subject to investor-state dispute settlement.) Just as CAFTA’s investment chapter subjected Guatemala’s railroad contracting practices to a multi-million dollar fine, the TPP’s expansion of this extreme investor-state system threatens the environmental, human rights, and Buy America conditions that the US places on its contracts.