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The Andean Foreign Investment Code: A New Phase in the Quest for Normative Order as to Direct Foreign Investment

Published online by Cambridge University Press:  28 March 2017

Covey T. Oliver
Covey T. Oliver*
Affiliation:
Of the Board of Editors
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Extract

Signs of inadequacy and crisis in general international law as to the economic ownership interests of aliens have been numerous since World War II. The pages o f the J ournal have recorded and analyzed a number of situations in which the existing legal order is not working well: ineffectual resorts to international adjudication; unilateral disregard of arbitral commitments; national decisions made in the name of international law but of dubious international acceptability; professional frustrations so intense as to have directed prime attention to happenstantial “salvage” operations. In a phase now apparently ended, groups in capital exporting countries have tried time after time to put forward normative formulations of investment codes as new positive law, only to have their efforts ignored in developing countries. Now we seem to be in a new phase, one in which direct investment-receiving, or host, countries, organized into groups or regional arrangements, compact among themselves that a comprehensive normative system shall prevail in each of them as to the legal relationships between foreign investors and each of those countries. Although foreign investment codes for particular states, including systems of prior restraints on entry in some developed countries, are not new, the Andean Foreign Investment Code is, indeed, a new juristic phenomenon. The Editors of the Journal have wished, therefore, to record and analyze preliminarily this new development in transnational investment law, one whose text has been carried in International Legal Materials and considered as to its possible impact in Research Panels organized by the American Society of International Law.

Type
Research Article
Information
American Journal of International Law , Volume 66 , Issue 4 , October 1972 , pp. 763 - 784
Copyright
Copyright © American Society of International Law 1972

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References

1 11 I.L.M. 126 (1972), with corrected pages 141 and 142. Unfortunately, we have not had the use of an official text in Spanish to check at several points the translation into English, supplied by the Department of State. Illustrative of the difficulties of Northamerican legal research in materials whose official versions are only in languages other than English, no Spanish text of the Andean Code has been found in a search of the libraries of two law schools in different parts of the country.

2 The Andean Code was reviewed by an Ad Hoc Panel of the Society on February 25, 1972; and we are indebted to its chairman, Professor Seymour J. Rubin; the Society’s Director of Studies, Dr. John Lawrence Hargrove, and his staff; and to the participants from the Department of State for the collation of background materials that have had utility also in the preparation of this study, even though some of them are still embargoed as to citation. The Society’s Panel on Inter-American Legal Questions and the Panel on Regional Institutions have also from time to time considered aspects of the Andean Community unification effort, including the Investment Code.

3 Meyer, C., Assistant Secretary of State for Inter-American Affairs, “Latin America: What Are Your Priorities?,” 60 Dept. of State Bull. 440, 442 (1969)Google Scholar: “. . . Finally, perhaps the key long-term consideration today is that capital wants to know the rules of the game, whatever the host country decides they may be.” Cf. Oliver, C., “Latin America and U. S. Business: The Deeper Challenge,” 59 Dept. of State Bull. 339, 340 (1968)Google Scholar.

4 This issue seems to pervade many aspects of contemporary legal education and scholarship in the United States; as to one area, see Reese and Rosenberg, Conflict of Law 589–91, 603–604 (1971). In the legal philosophy of public international law the normists and the methodologists are the poles. But the former are not concerned about the content of norms and the latter have difficulty in convincing that the value preferences asserted by them in many instances derive scientifically from the application of the asserted methodology.

5 Any objective appraisal supports this evaluation. See, Amer, L. Institute, Restatement (Second) The Foreign Relations Law of the United States § 165, esp. R.N.s. 1, 3; $ 185, R.Ns. 1–8 (1965)Google Scholar.

6 Estimating the “real world” effect of a required Calvo Clause is a somewhat painful case in point See, Note ( Graham, D.), “The Calvo Clause: Its Current Status as a Contractual Renunciation of Diplomatic Protection,” 6 Tex. Intl. L. Forum 289 (1971)Google Scholar.

7 General international law about aliens’ rights is not even given the recognition of rejection or counter-assertion in the Code, except for the “never more than equal treatment with nationals” requirements; tee infra pp. 768–69.

8 The Treaty of Rome does not go behind formal qualification for “corporate nationality” in a member state. French ploys suggesting a veil-piercing alteration have mildly frightened “The American Challengers” but have not found much favor, probably even in France. One reason, undoubtedly, is the tremendous clog on mobility of goods in the total market that a tracings-to-corporate-origins rule would cause.

9 11 I.L.M. 357, 373, and 374 (1972) carries the texts in English of the Commissions Decisions Nos. (46), Multinational Enterprise; (47) State Participation in Mixed Companies; (48) Investments Made by the Andean Development Corporation.

10 Cf. Perenzin, D, “Regulation of the Andean Investment Code: Colombia,” 4 Lawyer of the Americas 15 (No. 1, Feb. 1972)Google Scholar, which discusses a regime of implementation now in constitutional uncertainty. We are indebted to D. Gantz, Esquire, Attorney Adviser, Office of the Legal Adviser, Department of State, U.S.A., for background information on the nature and degree of implementation in each of the member countries as of mid-May, 1972. Conversations with young attorneys from Latin America, especially Dr. E. Vallamizar of Colombia, attending the Academy of American and International Law of the Southwestern Legal Foundation during the summer of 1972 have been of considerable further assistance as to matters currently lacking primary documentation. We are grateful for help without which the text point, that the time is ripe to take the Code as a significant new phase in the legal ordering of direct foreign investment, could not have been asserted by us with confidence.

11 Information coming informally from various sources, including Grantz, supra note 10. Cf. Diuguid, L., “Area Trade Pact Backed in Colombia,” The Washington Post, Feb. 11, 1972, at A26 Google Scholar, col 1 indicating that of that time Colombian of Bcials expected either the Andean Pact itself or the Investment Code to be submitted to Congress. . . . “perhaps in the coming week.”

12 Cf. Perenzin, op. cit. supra note 10.

13 Gantz, supra note 10, informs that the implementation has been partial in Ecuador and Peru, regulations are pending promulgation in Bolivia, and in Chile an implementing degree is expected to follow an official study now in progress. In all these countries the Code is stated to be “in force,” presumably in the sense that the Code as legislation has been approved for application where the administrative arrangements therefore are completed. In Latin American legal systems it is not uncommon for approved legislation not to be actively applied until it has been “reglamented” by the issuance by the executive of what we would call administrative regulations.

14 The recently deposed de jure government in Ecuador (Pres. Velasco) exercised an option under Art. 44 to make Arts. 40–43 inapplicable in Ecuador. There is some indication that the present coupist regime in Ecuador favors a stricter application of Code rules in relationship to foreign investors. We have been informed that Bolivia’s decree on the Code (apparently not yet fully implemented by reglamentation) moderates the Code somewhat in favor of external capital, while Peru and Chile’s national measures (still subject to reglamentation in the case of Chile) are, in general, stricter than the Code provisions. Perenzin, op. cit. supra note 10, reports that the Colombian reglamentation (Decree 2153, applying to Decree 1299, which latter jural act purported to put the Andean Code into effect as internal law) softened some of Decision 24’s provisions, such as those in Art. 17 limiting a Foreign Investor’s access to local credit. Also, the Art. 34 option to the government of the host country to acquire disinvested shares was renounced. On the other hand, the Colombian reglamentation, stalled on constitutional grounds, eliminated a loophole, in Art. 3 of Decision 24 and carried forward in Colombian Decree 1299, relating to the acquisition by a Foreign Investor of shares held by a local investor to avoid imminent bankruptcy of the company involved. Utilization of the loophole would involve the creation by the foreign investor of a wholly owned Foreign Enterprise which would then be able, so far as the Code is concerned, to acquire shares in certain circumstances in Mixed or National Enterprises. The Colombian Reglamentacion would, apparently, apply a “sham-substance” test administratively in such situations. This sketch shows how very much legal activity lies ahead if the Code comes into effect as treaty law binding the Member Countries each to the other and then is fully put into effect as national law and reglamented as such completely in each of the members. See, generally, “Economic Survey of the Americas,” New York Times, Jan. 28, 1972, at 62, col 7.

15 A powerful attitudinal factor in Latin America, as the writer has had many occasions to note while in various roles in Latin America. See Oliver, C., “Speculations on Developing Country Reception of Multinational Enterprise,” 11 Va. J. of Intl. L. 192, 194, 202 (1971)Google Scholar; Rubin, , “Multinational Enterprise and National Sovereignty: A Skeptic’s Analysis,” 3 L. and Policy in Intl Bus. 1, 30 (1971)Google Scholar. Cf., Fatouros, A., “The Computer and The Mud Hut: Notes on Multinational Enterprise in Developing Countries,” 10 Columb. J. of Transnational L. 325, 347–350 (1971)Google Scholar. Characteristically, the more “scientific” the appraisal of foreign investment problems in Latin America, the less the sensitivity, on the whole, to the irrational factors that often tend to condition reality far more than most contemporary “social science,” especially economics, will take into account. But see, Hirschman, A, “How to Divest in Latin America, and Why,” Princeton Essays in International Finance (No. 76, 1969)Google Scholar.

Art. 1 of the Code classifies enterprises as to the relationship between foreignness and non-foreignness in ownership-control of the shares.

16 Art. 2.

17 Arts. 27, 28.

18 Art. 3 (adequately covered by existing enterprises, no “takeovers” of national investment by foreign investors); specially regulated and “closed” sectors, Chap. Ill, especially Arts. 41, 42 and 43.

19 Arts. 7–11, 21, 37.

20 Arts. 20, 25, 26.

21 Arts. 45, 47.

22 Foreign Funds Control and related regulations of the United States from 1941 forward have probably furnished required reporting models to the Latin American countries. Particularly this is so where national leaders in those countries have had earlier experiences with being on the “short end” of the Northamerican controls. Cf. Executive Order 8389, as amended, (June 1940) and its progeny, including TFR 500, requiring depositaries in the United States to report aliens’ private holdings to the Treasury Department In some instances in the days of foreign exchange weaknesses among the European allies, 1945–1955 (roughly), the information thus acquired was furnished by the U.S. Treasury to the governments of nationality to the end that the mobilization by it of dollar resources could be maximized.

23 Somewhat along the lines of the Mexicanization model; cf. Butte, W., review of Wright, H. Foreign Enterprise in Mexico: Laws and Policies (1971), 7 Tex J. Transnational L. 339 (1972)Google Scholar, passim; More, J. and Rollins, H., “An Analysis of Current Mexican Restrictions on Direct Foreign Investment,” 5 id. 245, 252–55 Google Scholar (on the role of the Nacional Financiera) regarding disinvestment.

24 The capital “gap” in relationship to development, especially its foreign exchange element, has been frequently analyzed, sometimes debated. Essentially, macro-economic development doctrine is that for a developing country to grow at x rate it will need an increase of y over its normal rate of national savings; and z is made up of three elements: (i) national accumulations, as through increased taxes and the intensification of exports; (ii) public sector foreign assistance on grant and loan bases from national and multinational sources, comprising technical assistance (technology transfer) and transferred savings from developed countries (development capital); (iii) private sector foreign investment through loans and ownership investments. A major psycho-political problem exists as to the balance between abstention by the present attitude-making generations (to accentuate savings for development) in regard to quality of life and gross inequalities as to how within national societies the austerity is distributed. See Oliver, C., “Unmet Challenges of Inequality in the World Community,” 118 Univ. of Pa. L. Rev. 1003, 1013 (1970)Google Scholar.

25 Such as non-competitive pricing by supplier parents of essential (or required) materials, machines, and technology when dealing with their controlled subsidiaries in a particular national market. A strongly held Latin American attitude is that they are forced by the foreigners “to pay too much for their whistles.” This attitude does not take other factors than non-competitive pricing (“over-invoicing”) into account, such as lack of sufficient volume in the national market to make economics of scale possible and very high import duties and other state charges on imported components. Nonetheless, the attitude persists and is exacerbated by (i) a still increasing gap between the prices of imported manufactured articles in relationship to exported agricultural production and (ii) the effective demand of foreign suppliers for settlement in scarce foreign exchange.

26 The Consensus of Viña del Mar, 8 I.L.M. 974 (1969), a trade and development manifesto directed to the United States by the Latin American countries as a group, is only the most official and multinational expression of a fear and belief that foreign private sector investment has the power to, and does, distort and frustrate national senses of what the priorities ought to be in the application of national resources. See, also, Point 33 of the Consensus, which declares flatly that in accounting for the total amounts of foreign development assistance, private sector foreign investment should be disregarded. This latter view, apparently, is not entirely shared by the Andean Community under Decision 24. See generally, Santa Maria, D., “Perspectives on Spanish American Legal Norms governing Mining Concessions, ‘Chileanization’, and the Consensus of Viña del Mar,” 11 Va. J. Intl. L. 177 (1971)Google Scholar.

27 As where there is reinvestment of earnings, conduct which the U.S. Internal Revenue Code (Sub-part F esp. 954(b)(1)(A)) does not discourage, where the reinvestment is in a developing country. The income from a controlled foreign corporation is attributed to the U.S. taxpayer-owner, whether repatriated by dividend or not, if the controlled corporation is in a developed country, not if it is in a developing country as specified by the Commissioner. This differentiation obviously encourages both reinvestment and over-invoicing, supra note 25, in developing countries.

28 Supra notes 1 and 9.

29 Art 1. In this paper the specific terminology of Art 1 will be carried with the capitalizations and type face used in Decision 24, in order to ensure maintenance of the technical differentiations that are vital to the system of treatment.

30 The definition of Direct Foreign Investment in Art. 1 seems to read, as translated, that either contributions to capital must be in “freely convertible currency” or in local (national) currency “. . . entitled to be transferred abroad.” There seem to be these uncertainties: (i) Are the above phrases restrictive or descriptive—Direct Foreign Investment is little favored by the Code, hence why not incline to treating it as a residual category? (ii) What about a foreigner’s host country local currency that is not “freely convertible” under host country foreign exchange controls? (iii) What about a foreigner’s investment of another Andean country’s local currency, if that currency is not, because of foreign exchange control, freely convertible to world hard currencies but is “freely convertible” with the national currency of the host country?

31 I.L.M., op. cit. supra note 1, 144–46.

32 Art. 4.

33 Shea, , The Calvo Clause (1955)Google Scholar, Amer, L. Institute, Restatement (Second) The Foreign Relations Law of the United States § 202, esp. R.N., 603 Google Scholar.

34 The effect of Calvo Clauses, as voluntary private investor contracts, upon the Vattelian Doctrine that the State of nationality alone has an international reclamation for the conduct of another State towards its nationals is reviewed in Graham’s Note, op. cit. supra note 6.

35 The slight uncertainties about an absolute precondition of entry that a “new Foreign Enterprise” must undertake “fade-out” arise from certain aspects of the draftsmanship of the Code, viz: (i) the dichotomy of “new-old” is not clearly provided in the text and organization of the Code; (ii) the language of Art. 30 speaks to enterprises, not to Member Countries; (ail) the rationale for a sharp differentiation between the option left to the old Foreign Enterprise and its assumed denial to a new one is not clearly expressed in the Code. Cf. Perenzin, op. cit. supra note 10 at 25 and 26, noting that the Colombian Reglamentation presently in constitutional uncertainty contains no nationality-of-ownership requirements as to investments in “tourism” (which might include hotels, one assumes).

36 The professionally-involved reader should consult the text of Art. 41, preferably in Spanish. The translation used reads “public services,” but it includes “sewers, . . . cleaning and sanitary,” not ordinarily private businesses affected with the public interest in Northamerican experience.

37 Art 42.

38 Art. 43 should be treated by the professionally-involved reader as we recommend in note 36 for Art. 41.

39 Art 40 includes in the “basic products sector:” “. . . the primary (emphasis supplied) activities of exploration and exploitation of minerals of any kind, including liquid and gaseous hydrocarbons, gas pipelines, oil pipelines . . . .” What is “primary?” What about refining, domestic marketing of gasoline, and lubricants, and the liquification of natural gas for containerized distribution? Note, also that the preference for participation with State enterprises relates only to “exploration and exploitation.”

40 Arts. 37 and 40 (last para.).

41 This is well-documented in commentaries and amply supported in history. Porfirio Diaz’s alleged “sell-out” of Mexican minerals to foreign companies, in disregard of inherited fundamental tenets (Consejo de Aranjuez, 1523, the King of Spain’s mining law for the colonies), and Mexican Constitutions of before his time, which provided that subsurface mineral rights belong to the State and cannot be made the subject of private property rights, was the root of the “oil problem” in Mexico, and of a good deal else. See Wright, op. ctt. supra, note 23, 51–61. The International Petroleum Company controversy in Peru goes back to Simon Bolivar’s disregard of basic Spanish mining law. Fatefully the Gran Libertador ordered the La Brea and Parinas Tar Pits to be sold to a private party, who in turn made mesne conveyances. If the King of Spain had made any exception for Peru, the Peruvians have now forgotten it “Title” to the subsurface eventually passed to IPC, a Canadian corporation, which in turn was acquired by the Standard Oil Company of New Jersey. Note, also, the drive for the “Chileanization” of foreign majority interests in copper mining, D. Santa Maria, op. cit. supra note 26, 177–78, 185–86. In this last instance a “transformation” to a substantial minority position agreed upon with the total authority of the de jure regime of the Chilean state (that of Pres. Eduardo Frei), is now in process of dismantlement by successor de jure Pres. Allende. This reversal of the Chilean transformation approach seems mainly motivated by the doctrinal impetus of 19th century romantic Marxism. Cf. the Fabian impulse leading to the nationalization of the coal and steel industries by the Attlee Labor Government in the United Kingdom. It remains to be seen whether Dr. Allende will be the Lenin or the Clement Attlee of socialism in Chile.

42 Particularly as to the development of a liquified gas export industry, according to press accounts.

43 Especially as to its restrictions on the participation of Foreign and Mixed Enterprises in “. . . domestic marketing enterprises of products of any kind.”

44 The American Challenge (1967) was widely read and commented upon in Latin America. Often, as its author has noted in public discourse, “threat” was substituted for “challenge” in the minds of his readers there. If his real lesson (to European business leaders) was “Go and do likewise,” the point was rather widely missed to the south of the United States.

45 Schliesser, P. , “Restrictions on Foreign Investment in the Andean Common Market,” 5 Intl. Lawyer 586, at note 6 (1971)Google Scholar, explains the “Trojan Horse” theory of direct foreign investment in common market areas as follows: “. . . the natural tendency of foreign investors to take advantage of expanding trade in tariff shelter areas through local subsidiaries. . . .”

46 Both terms have been used to describe “optional fade-out;” see the title of Hirschman, op. cit. supra note 15 (“divest”) and Behrman, J., “Sharing International Production through the Multinational Enterprise and Regional Integration,” 4 Law and Policy in Int’l. Bus. 1, at n. 17 (1972)Google Scholar. Presumably by partially divesting oneself of shares of stock, one accomplishes a degree of disinvestment in the enterprise. Inasmuch as the Code word is “transformation,” the term “disinvestment” seems to us to fit the situation slightly better, although “divestment” might well have been le mot juste for Hirschman’s proposals, which included a regional public entity to take title to aliens’ excessive shareholdings.

47 In Spanish “ch” is a separate letter of the alphabet, coming after “c.”

48 Those of Arts. 42 (financial institutions) and 43 (domestic marketing enterprises, etc.). Note that the public utilities sector (Art. 41) has no provision whatsoever for the entry of any new foreign investment

49 Art. 35 and the National Investor definition in Art. 1. The only available text of the Code, see note 1, uses in English translation the term “private individuals.” We are forced to assume, lacking an official text in Spanish, that “moral persons” (private corporations) were deliberately excluded, presumably to safeguard “true national ownership” from evasion through a chain of corporate ownerships. If this is the case, the process of transfer of aliens’ shares to private National Enterprises in existing corporate form (e.g., “takeovers by national, private corporations”) may turn out to be somewhat cumbersome.

50 It is believed fairly widely in Latin America that the low state of investment in shares of stock and the underdevelopment of stock markets tend to understate, in terms of stock market quotations, the “true” value of shares. In the past this belief has created considerable concern lest foreign (usually Northamerican) conglomerates or “raiders” pick up bargains among existing locally-owned enterprises. Note that the Code at Art. 3 requires the Member Countries to prohibit takeovers by foreign investment of “. . . shares, participations, or rights owned by national investors.”

51 Considering the volume of “excess” foreign ownership and the low absorptive capacity over the short initial time span for “transformation,” the likelihood of a smooth and complete area-wide transfer from foreign to national private individual ownership is slight. The patterns may vary as between the countries, of course, but in no one of them do we forsee an easy and rather immediate shift. The utilization of a State-owned “bucket,” therefore, seems essential, in the initial stages at least.

52 The available English translation of Decision 47, 11 I.L.M. 373 (1972) uses the phrase “determinative powers” for the Spanish, carried in parenthesis: capacidad determinante. In any event, the decision goes on to state: “Determinative power is understood to mean a requirement that the representatives of the state concur in the fundamental decisions for the carrying on of the enterprise.” We think this clearly means that the State shares, regardless of being in the minority, must have control through a kind of “veto” power.

53 Note 15, supra, and the text to which it corresponds.

54 There is a Working Party response to the directive in Provisional Art. G proposing Regulations on the Application of Industrial Property Standards. It is stated on the document that it will be considered by the Commission in March 1972. So far we have not been able to find out what action has been taken; and, in any event, this is not the place for examination of the details of industrial property regulation.

55 E.g. the drain syndrome, C. Oliver, op. cit. supra note 15, 195.

56 The international development lending agencies referred to work on the principle of competitive bidding among suppliers, almost always from the private sector; and the bid may be on a “package” that involves property rights in technology. The likelihood that such development loan funds might involve technology transfers would seem to increase as the World Bank Group begins to move, in the spectrum of types of projects supported, from those involving basic capital infrastructure toward industrial production, agro-business, education, tourism, etc. The Inter-American Development Bank has throughout its life been willing to lend on a fairly wide range of projects. See, generally, C. Oliver, op. cit. supra note 24, 1015–17. Of course, if such development lending should only involve proposals for the lump sum purchase of technology, rather than pay-outs through royalty and licensing fees, the speculation in die text would be irrelevant

57 Compare the functional classifications of multinational enterprises as to types of ownership/control in Perlmutter, H., “The Tortuous Evolution of the Multinational Corporation,” 4 Colum. J. of World Business” 9, 11 (1969)Google Scholar [general] and C. Oliver, op. cit. supra note 15, 199 (“Wholly Less-Developed Country Aggregations”), 202 [Latin America].

58 Vagts, D., “The Multinational Enterprise: A New Challenge for Transnational Law,” 83 Harv. L. Rev. 739 (1970)CrossRefGoogle Scholar is a highly useful compilation of concepts about MNE’s. Common to the prevailing concepts in developed country writing is the idea of centralized control of business decision-making at a single locus. This locus, of necessity at the present stage of the distribution of world capital, is in a developed country; and there has been very little evidence that majority ownership/control by other than developed country nationals has been in the contemplation of the definers. “On the whole, the theme of the MNE in relationship to the LCD’s has not been fully explored,” C. Oliver, op. cit. supra note 15, n. 4. See, also, A. Fatouros, ibid., passim. J. Behrman, op. cit. supra note 46, and elsewhere, gives highly convincing doctrinal support to the notion that a “true” MNE must involve lateral mobility of resources and market opportunities between die various LDC-based subsidiaries of die controlling parent corporation. This means that national tariff, exchange control, and other barriers interposed by the states of die subsidiaries’ respective nationalities must give way—i.e., a “common market be established—before the transnational complex can properly be viewed as “anything new.” Perlmutter’s classification, supra note 57, does not quite fit the Behrman prescription; but cf. C. Oliver, (ibid., 198–200. One difficulty with reaching a consensus on what an MNE is links to Humpty Dumpty’s well-known attitude toward semantics; another is that the term “multinational corporation” has been used by some apologists for the existing order in world investment as a rhetorical and emotive justification therefor. As between the developed and the developing world, it is not to be expected that the last word on this matter will come from the former. The Andean Investment Code suggests, for example, an LDC “initial bidding” concept of the “multinational” as an aggregation wholly owned and controlled by states and/or nationals of the region itself.