151. Memorandum of Conversation1

SUBJECT

  • Encouragement and Protection of Investment

PARTICIPANTS

  • Nathaniel Samuels, Deputy Under Secretary for Economic Affairs
  • Charles Meyer, Assistant Secretary, Bureau of Inter-American Affairs
  • Herbert Salzman, Assistant Administrator, Office of Private Resources
  • David D. Newsom, Assistant Secretary for African Affairs
  • John R. Stevenson, Legal Adviser
  • Eugene Braderman—E/CBA
  • Sidney WeintraubE/IFD
  • Robert Smith—AF/W
  • Joseph Mintzes—IN

The Working Group on Protection of U.S. Private Investment Abroad2 met with Mr. Samuels this morning to discuss the paper prepared [Page 389]by L on the “Encouragement and Protection of Investment in Africa, Asia and Latin America.”3 Mr. Stevenson reported that there appeared to be general support for a more selective approach to the encouragement of U.S. direct investment in the developing countries, and that there also appeared to be considerable support for a policy of avoiding coercion in the solution of investment disputes. Mr. Samuels then asked whether the U.S. should continue to encourage U.S. private investment abroad through such direct and tangible means as the investment guaranty program. He wished to know the extent to which that program actually contributes to the flow of investment funds to developing countries and what impact it has on our relations with those countries. What effect would the curtailment of the program have on investment?

Mr. Salzman indicated that, given the fact that we have had an investment guaranty program for many years, the termination of the program would have wide repercussions. In his view, countries such as Indonesia would be hurt, and it would be particularly difficult to induce flows of debt investment to LDC’s without guaranties. In general, investors would demand a higher rate of return. AID has considered the possibility of placing a ceiling on the amount of guaranties in certain countries where AID exposure is very great and it has decided to gradually wean some countries such as Korea from the investment guaranty program. AID has a guaranty exposure commitment in Korea of approximately one billion with another 500 million in the pipeline. Although it is not possible to estimate the amount of investment that might be lost if guaranties are not forthcoming, the percentage would be significant. Mr. Salzman emphasized that there are many other aspects to U.S. encouragement of investment than the guaranty program including information, advisory assistance, and protection policies, and he stated that a judgment on the investment guaranty program should be accompanied by a review of measures for the protection of U.S. investment abroad more detailed than that in the draft paper.

There was also discussion of the implications of the guaranty program for U.S. Government involvement in investment disputes with foreign governments. Although it was pointed out that the U.S. Government cannot expect completely to avoid involvement as long as it follows the traditional practice of diplomatic espousal of claims, an investment guaranty may involve the United States Government at an early stage of the dispute as U.S. Government responsibility under an investment guaranty contract may come into play before the host government’s decision on compensation is determined. On the other hand, AID guaranty contracts with investors contain their own definition of [Page 390]expropriation and compensation formulas which may differ from the obligation of the host government under international law.

Mr. Samuels indicated that he was leaning towards not encouraging investment where it is not wanted. He suggested it might be best to encourage the developing countries to determine how much they wish to encourage foreign private investment and to establish the necessary incentives. U.S. investors could rely upon tax write-offs for losses from foreign expropriations. Mr. Braderman mentioned three considerations other than foreign policy consequences that argue against an investment guaranty program. (a) It is questionable whether unilateral programs such as guaranties improve the investment climate; (b) U.S. labor is concerned about the creation of competitive export industries in other countries; and (c) there is some opinion that foreign investment diverts resources that are needed at home.

Mr. Weintraub and Mr. Salzman emphasized the development objectives of the investment guaranty program and the increasing importance of transfers of private resources as U.S. public assistance for developing countries declines, at least in relative terms. Mr. Newsom suggested the importance of distinguishing between Africa where investment guaranties are needed to channel investment into new areas and other regions with a history of investment disputes. In Africa, U.S. influence depends upon association with the transfer of private resources, which transfer may or may not depend upon guaranties. Further, Africa holds large supplies of important minerals and it is in the national interest to secure access to these supplies through U.S. private investment.

Mr. Newsom stated that in Africa in the last 10 years there have been no expropriations without compensation except in Algeria,4 and he urged that we maintain perspective on the few problems we have had in comparison with the total magnitude of investment. In this regard, it was recalled that AID has paid claims under political risk guaranties of approximately $3,000,000.

Mr. Meyer said that the U.S. Government should determine that it is in the national interest to ensure sources of certain important minerals. There are many techniques for encouraging investment in those sectors. Noting that protection will present problems, he observed that we cannot hope to have a policy that will be completely free from problems.

In conclusion, Mr. Stevenson suggested that the group seemed to be agreed on a policy of selective encouragement of investment in the [Page 391]developing countries. No one supported a policy of general encouragement of all investment. With respect to protection policy, there may be some difference of emphasis, but there seems to be agreement that we do not need the Hickenlooper Amendment. Mr. Samuels asked if there were any new ideas on measures to encourage governments to respect their agreements with investors. Mr. Stevenson expressed the view that perhaps further guidance could be sent to our posts abroad to be alert to investment disputes and to advise the Department more fully at an earlier stage.

At the close of the meeting, Mr. Samuels reviewed the specific suggestions in Mr. Stevenson’s memorandum of August 11 and expressed the following views.

(a)
AID should administer the investment guaranty program selectively. In addition to the actions taken to date, consideration should be given to maintaining an investment guaranty program only in those countries that are prepared to conclude agreements containing adequate assurances for the settlement of investment disputes. Others at the meeting expressed reservations on this point.
(b)
The U.S. Government is now supporting a multilateral investment insurance scheme with participation of the LDC’s in some form. We might be prepared to forego that participation, but four or five donor countries will not.
(c)
The U.S. Government already encourages investors to accept local capital participation to some extent, but the outstanding guidance to our posts calls for a neutral position on this matter. Perhaps the Embassies should be given new guidance indicating U.S. Government support for the concept of local capital participation but not making such participation a condition for U.S. Government support.
(d)
At the first opportunity, the Hickenlooper Amendment should be revised to afford the President greater flexibility. The Administration AID bill to be submitted to the 92nd Congress may be the best opportunity.
(e)
The guidance to U.S. posts with respect to the encouragement of U.S. private investment and the avoidance of investment disputes should be revised and brought up to date.
(f)
Additional measures to encourage acceptance of impartial procedures in the settlement of investment disputes should be considered in the light of the comments to be submitted on the L memorandum on that subject.
(g)
No decision was taken on the desirability of a statement by the Secretary on U.S. policy towards investment. However, subsequently Mr. Samuels asked Mr. Stevenson to revise the paper in light of this [Page 392]meeting omitting the options rejected and presenting recommendations to the Secretary.
  1. Source: National Archives, RG 59, Central Files 1970-73, FM 10-1. Confidential. Drafted by M.B. Feldman (L/ARA).
  2. Presumably the working group referred to in Document 150.
  3. Not found.
  4. Accommodations were reached in investment disputes with Zambia and the Central African Republic. Zambia had assumed 51 percent of an American mining company and the Central African Republic had seized American-owned diamond mines.