NAC Files, Lot 60D137

Minutes of Meeting (No. 130) of the National Advisory Council, Washington, June 14, 1949


[Here follow list of persons present (24) and discussion of a prior agenda item.]

2. Treaty Provisions Covering Protection of United States Foreign Investment

Mr. Glendinning1 pointed out that under the recommended action the Council would advise the Department of State that it favored negotiation of treaties which would provide adequate protection for United States enterprises and investments abroad. The action would further express the opinion of the Council that proposals for substantial deviations from the principles outlined should be referred to the Council (NAC Document No. 838).

[Page 641]

Mr. Glendinning explained that a joint NACECEFP working group had been considering the problem over a considerable period of time. The outline of provisions submitted was not intended (with the possible exception of item IV) to indicate the actual wording to be included in treaties. The attempt had been to state broad principles. After the State Department had prepared a model draft of articles incorporating these principles, the matter would come again to the Staff Committee, and would be reviewed in the Council if considered desirable. The paper presented for Council consideration was in the main an agreed paper and represented compromises on many items. However, there were minority views on certain points. The subject matter was divided into five principal categories:

Equitable treatment.—There was a general statement that United States investors should be accorded non-discriminatory treatment. This would mean that United States investors would obtain national treatment with respect to investments in all lines except banking, extractive and public utility activities. With respect to the latter categories United States investors would receive most-favored-nation treatment. One broad exception related to measures concerned with national security. There was also a general provision for consultation on questions as to what would constitute equitable treatment.
Reasonable freedom to operate, control and manage an enterprise.—The broad principle was stated that United States investors should have such freedom. Specific provision would be made for the right of United States enterprises to hire personnel wherever they choose. This was directed at legislation requiring that a certain percentage of employees be of local nationality. A minority felt it desirable to spell out that United States nationals should have the right to own a majority of the stock and have majority voting rights on the Board of Directors.
Expropriation and compensation therefor.—There was a broad statement that compensation should be prompt and in full and that provision should be made therefor at the time of taking. This did not necessarily mean that payment would be made immediately, but that provision should be made for compensation. It was felt that the United States could not ask for more than we were willing to give and since compensation here is not paid prior to taking it was not thought we could ask for more favorable treatment. A minority held that local currency payments to parties having property expropriated should not be subject to exchange restrictions except in connection with measures necessary to protect a country’s essential security interests.
Withdrawal of funds and exchange restrictions.—The provision favored by the majority was that countries should not impose exchange restrictions either on transfer of capital or earnings, except in time of exchange stringency. Priority would be established for [Page 642] payments for goods and services deemed essential to the health and welfare of the people. It would also be recognized that where the International Monetary Fund had authorized restrictions for this purpose the country might impose them. If restrictions were imposed there should be consultation within three months for the purpose of establishing some arrangement for some transfer of funds. A minority view on this point was that there should be some provision for a minimum transfer of earnings and capital regardless of the degree of exchange stringency. This minimum might vary from country to country but some provision for transfer should be included. The only exception would be where the International Monetary Fund had specifically authorized the country concerned not to make payments for capital and interest.
Taxation.—The general provision was that we should obtain not less than national treatment. The only exception would be where under our own regulations we did not provide national treatment, e.g., in cases where foreign corporations were not considered resident in the United States. In other cases it would be provided that we should receive at least most-favored-nation treatment and that the division of levies on income from various foreign sources should be reasonable. These latter provisions had been reviewed by the tax experts.

Mr. Thorp said that he felt that the Staff Committee had done an excellent job in setting forth the best use of the treaty device in eliminating obstacles to private capital investment abroad. He added that the State Department would be prepared to take a very firm line with respect to these provisions. He warned, however, that there would have to be prolonged discussion with many countries before they would be prepared to accept this kind of understanding. We would have to make clear that new investment would have to come in voluntarily—not provided through taxation of the American public. The suggested provisions ran clearly counter to the national feeling of many countries and to legislation that now exists. He had no doubt that it was the right line for us to take, but he did not want the Council to feel disappointed if a number of treaties were not negotiated immediately. If we were quite firm a good many countries would come toward the desired position. During the recent visit of the President of Brazil there had been indications of a realization that opening up of channels to provide investment was the way to get the economic development they want.

Mr. Thorp then referred to the bilateral agreements under ECA as an example of the fact that identical results cannot be obtained in negotiations with a series of countries. National pride or existing laws affect the way a thing is said and more provisions may not be appropriate. [Page 643] It would be necessary to come back to the Council from time to time to discuss particular situations. In some instances the question may be raised as to whether it would be worth going ahead with a treaty where modifications of the basic position would be involved. As foreign countries see it they would be making concessions to us and would not be getting much in return that they do not already have. We would be giving them American investment but in the treaty this would not be a reciprocal item. The treaty concessions should be thought of as the conditions that must be set up before there can be a flow of investment. The Chairman observed that there would be no reciprocity if loans were made without adequate preparation. In the negotiations foreign countries should be told we are laying the ground work on our side in encouraging investment and if the investment does not flow there would be no obligation on their part. There would only be a concession on their part if there was United States investment abroad. Both sides would have to work together to bring about full reciprocity. Mr. Thorp agreed that in the large sense the proposal was reciprocal.

Mr. Gaston2 said he assumed the treaties would be effective retroactively and that existing investments would be covered. It was agreed that this assumption was correct.

Mr. Gaston also observed that he thought it was dangerous to introduce into any such agreement the concept of a minimum rate of return or a minimum amount to be transferred. Such a minimum quickly becomes a maximum. He presumed that these negotiations and treaties would be the prerequisites referred to in the action of the Council regarding guaranties. His earlier reaction had been that little was to be gained from guaranties, and that if countries established conditions favorable to investment they would get investment without guaranties. Now he was not so sure that was true since there are differences between making an investment subject to foreign law and making an investment subject to a guaranty which makes the United States a party to requiring the foreign country to abide by the conditions of investment. In the latter instance the guaranty would become a substantive thing.

Mr. Blaisdell3 felt that the State Department in undertaking a program of negotiation of treaties of this kind was faced also with the question of broader treaties such as the treaties of friendship, commerce and navigation. A treaty will in all probability do very little to stimulate investment in itself and do no more than finalize an agreement between two countries where a flow of capital is going on and a [Page 644] treaty can take care of the fringe edges. He believed the broader treaties, which deal with matters of significance to investment, such as navigation and commercial rights, would be preferable to purely investment treaties. He observed that the statement before the Council did not preclude the broader kind of treaty.

Mr. Glendinning observed that in the Staff Committee this problem had been considered and in presenting the document the Staff did not intend to deal with an investment treaty per se. The Staff was concerned with the content of certain provisions regardless of context, whether in an FCN treaty or negotiated separately. It was not intended to prejudge the issue.

Mr. Thorp said that from the point of view of the State Department it was very desirable to get the broader type of treaty, covering the rights of persons, shipping rights, etc. The Department hoped to press for a broad type of treaty containing these investment provisions.

Without further discussion the recommended action was approved as reflected in the majority statement.

Action. The following action was taken (Action No. 334):

The National Advisory Council advises the Department of State that it favors negotiation of treaties which will provide adequate protection for United States enterprises and investments abroad and which will include the principles set forth in the attached outline of provisions. The Council is of the opinion that proposals for substantial deviations from these principles should be referred to the Council.

Outline of Provisions

I. Equitable treatment.

United States investors shall at all times be accorded non-discriminatory, reasonable, fair and equitable treatment. In particular they shall be accorded national treatment as a minimum with respect to the right to establish and engage in all economic activities except fiduciary, deposit banking, extractive, transport, communications and public utility activities.

They shall be accorded most-favored-nation treatment as a minimum for the excepted activities noted above, and also for all activities enjoying national treatment whenever most-favored-nation treatment is more favorable than national treatment.

This treaty shall not preclude the application of measures necessary to fulfill the obligations of a Party for the maintenance or restoration of international peace and security, or necessary to protect its essential security interests.

Upon the request of either Party there shall be consultation regarding any action or proposed action which such Party considers to be in derogation of obligations undertaken in this treaty.

[Page 645]

II. Reasonable freedom to operate, control and manage an enterprise.

United States investors shall have the right effectively to operate, control and manage enterprises which they have established within the other country.

Investors shall have the right to engage employees of their choice, regardless of nationality, also technical experts, who shall have the right, among other things, to make examinations, audits and technical investigations, and to render reports in connection with the planning and operation of enterprises in a foreign country, regardless of the extent to which they may have qualified for the practice of a profession within such country.

III. Expropriation and compensation therefor.

Property shall not be taken except for public purposes nor without prompt payment of just compensation. Such compensation shall be in an effectively realizable form and shall represent the full equivalent of the property taken, and adequate provision shall have been made at or prior to the taking for the determination and payment thereof. If such compensation is paid otherwise than in the currency of the investors it shall be convertible into the currency of the investor as provided in Article ——— (see item IV 4).

IV. Withdrawal of funds and exchange-restrictions.

The treatment prescribed in the present Article shall apply to all forms of control of financial transactions, including (a) limitations upon the availability of media necessary to effect such transactions, (b) rates of exchange, and (c) prohibitions, restrictions, delays, taxes, charges and penalties on such transactions; and shall apply whether a transaction takes place directly, or through an intermediary in another country. As used in the present Article, the term “financial transactions” means all international payments and transfers of funds effected through the medium of currencies, securities, bank deposits, dealings in foreign exchange or other financial arrangements, regardless of the purpose or nature of such payments and transfers.
Financial transactions between the territories of the two Parties shall be accorded by each Party treatment no less favorable than that accorded to like transactions between the territories of that Party and the territories of any third party. Each Party, however, reserves rights and obligations it may have under the Articles of Agreement of the International Monetary Fund, except to the extent such rights and obligations are waived by the provisions of paragraph 4 of the present article.
Nationals and companies of either Party shall be accorded by the other Party national and most-favored-nation treatment with respect [Page 646] to financial transactions between the territories of the two Parties or between the territories of such other Party and of any third country.

Nationals and companies of either Party shall be permitted to withdraw freely from the territories of the other Party, by obtaining exchange in the currency of their own country,

earnings, whether in the form of salaries, interest, dividends, commissions, royalties or otherwise; and funds for amortization of loans and depreciation of direct investments and transfers of the whole or any portion of the compensation referred to in paragraph ——— of Article ——— (see III supra) and
funds for capital transfers.

If more than one rate of exchange is in force, the rate applicable to the withdrawals referred to in the present paragraph shall be a rate which is specifically approved by the International Monetary Fund for such transactions or, in the absence of such specifically approved rate, an effective rate which, inclusive of any taxes or surcharges on exchange transfers, is just and reasonable.

Each Party shall retain the right in periods of exchange stringency to apply: (i) exchange restrictions to the extent necessary to assure the availability of foreign exchange for payments for goods and services essential to the health and welfare of its people; and (ii) exchange restrictions that are specifically approved by the International Monetary Fund, in the case of a member of the Fund; it is understood that exchange restrictions shall not be applied to the withdrawals referred to in paragraph (4) (a) of this Article, except at a time when exchange restrictions shall have been applied with respect to payments for goods other than those essential to the health and welfare of its people. In the event that either Party applies exchange restrictions, it shall, within a period of three months in consultation with the other Party, make reasonable and specific provision for the withdrawals referred to in paragraph (4) (a) of this Article, together with such provision for the withdrawals referred to in paragraph (4) (b) of this Article as may be feasible, giving consideration to special needs for other transactions, and shall afford the other Party adequate opportunity for consultation at any time regarding such provision and other matters affecting withdrawals. Such provision shall be reviewed in consultation with the other Party at intervals of not more than 12 months.
In general, any control imposed by either Party over financial transactions shall, subject to the reservations set forth in paragraphs 2 and 4 of the present Article, be so administered as not to influence disadvantageously the competitive position of the commerce or investment [Page 647] of capital of the other Party in comparison with the commerce or the investment of capital of any third country.

V. Taxation

Investors generally shall be accorded not less than national treatment. However, in the case of nonresident alien individuals and foreign corporations not engaged in business in the United States, it is recognized that national treatment may not be possible, and in such cases an approximation to national treatment will be accorded.

Investors shall be accorded most-favored-nation treatment and in the event that most-favored-nation treatment is more favorable than national treatment investors shall enjoy the more favorable of the two.

In the case of income derived from two or more countries, each country agrees not to levy against more than that proportion of the total income which is reasonably attributable to it.

(Note: All taxation provisions should be subject to the advantages (1) in minor respects accorded to contiguous countries, (2) arising from double taxation agreements, and (3) based upon reciprocal agreements with other countries.)

[Here follows discussion of other subjects.]

  1. C. Dillon Glendinning, Acting Secretary of the National Advisory Council.
  2. Herbert E. Gaston, Export-Import Bank.
  3. Donald C. Blaisdell, Department of Commerce.