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104th Congress Exec. Rept.
2d Session 104-15
TREATY BETWEEN THE UNITED STATES OF AMERICA AND MONGOLIA CONCERNING THE
ENCOURAGEMENT AND RECIPROCAL PROTECTION OF INVESTMENT, WITH ANNEX AND
June 20, 1996.--Ordered to be printed
Mr. Helms, from the Committee on Foreign Relations, submitted the
R E P O R T
[To accompany Treaty Doc. 104-10]
The Committee on Foreign Relations to which was referred
the Treaty Between the United States of America and Mongolia
Concerning the Encouragement and Reciprocal Protection of
Investment, with Annex and Protocol, signed at Washington on
October 6, 1994, having considered the same, reports favorably
thereon without amendment and recommends that the Senate give
its advice and consent to ratification thereof as set forth in
this report and the accompanying resolution of ratification.
The principal purposes for entering into a bilateral
investment treaty (BIT) are to: protect U.S. investment abroad
where U.S. investors do not have other agreements on which to
rely for protection, encourage adoption of market-oriented
domestic policies that treat private investment fairly, and
support the development of legal standards consistent with the
objectives of U.S. investors. The BIT, therefore, is intended
to ensure that United States direct investment abroad and
foreign investment in the United States receive fair, equitable
and non-discriminatory treatment.
The proposed treaty together with the proposed annex and
protocol, was signed on October 6, 1994. No bilateral
investment treaty is currently in force between the United
States and Mongolia.
The proposed treaty and annex were transmitted to the
Senate for advise and consent to ratification on July 26, 1995
(see Treaty Doc. 104-10). The Committee on Foreign Relations
held a public hearing on the proposed treaty together with the
proposed annex and protocol on November 30, 1995.
Bilateral investment treaties (BITs) are the result of a
treaty program begun in 1982 as a successor to the Friendship,
Commerce, and Navigation Treaties that formerly set the
framework for U.S. trade and investment with foreign countries.
The BIT is based on a U.S. model treaty.
All parties must agree to the basic guarantees of the model
before the United States will enter into negotiations on a
treaty. The six basic guaranties contained in the model are:
investors receive the better of national or most
favored nation status;
expropriation of private property is limited and a
investors have the right to transfer funds into and
out of the country without delay using a market rate of
inefficient and trade distorting practices such as
performance requirements are prohibited;
investment disputes may be submitted to international
top managerial personnel of an investor's choice may
be engaged regardless of nationality.
Since 1982, the United States has signed 37 BITs, and the
Senate has given its advice and consent to the ratification of
24 BITs. Twenty two BITs are currently in force. But the Senate
has ratified two treaties that have not entered into force with
Russia, where the Duma has failed to ratify, and with Ecuador,
which was ratified by both countries, the U.S. is delaying the
exchange of instruments until Ecuador has fully implemented its
obligations under the U.S.-Ecuador intellectual property rights
agreement. There are currently 12 on-going negotiations for
BITs with other countries.
b. comparison to the model
The following compares the provisions of the Treaty Between
the United States of America and Mongolia Concerning the
Encouragement and Reciprocal Protection of Investment, with
Annex and protocol (Treaty Doc. 104-10) (BIT), with those of
the United States 1992 Model Bilateral Investment Treaty
(Model), on which the former is based.
Preamble.--The preamble of the BIT is identical to that of
the Model. The Preamble of the BIT establishes the goals of the
treaty to include: greater economic cooperation, the
stimulation of the flow of private capital and economic
development, maximization of effective utilization of economic
resources and the improvement of living standards, respect for
internationally recognized workers rights, and the maintenance
of health, safety and environmental measures of general
application. The goals outlined are not legally binding but may
be used to assist in interpreting the Treaty and in defining
the scope of Party-to-Party consultation procedures pursuant to
Article I (definitions and general provision).--The BIT
follows the Model with respect to definitions except that the
BIT adds definitions for the terms ``investment authorization''
and ``investment agreement.'' An ``investment authorization''
is defined as ``an authorization granted by the foreign
investment authority of a Party to an investment or a national
or company of the other Party (Art. I:1(f)). An ``investment
agreement'' is defined as ``a written agreement between the
national authorities of a Party and an investment of a national
or company of the other Party that (i) grants rights with
respect to natural resources or other assets controlled by the
national authorities and (ii) the investment, national or
company relies upon in establishing or acquiring an
investment'' (Art. I:1(g)). State Department officials have
informed Committee staff that these definitions were added to
ensure the coverage of investment in natural resources--the
sector of greatest interest to U.S. investors--which typically
involves investment agreements and authorizations.
The BIT follows the Model as to the right to deny treaty
benefits to companies controlled by nationals or firms of third
countries and the rule that any alteration of the form in which
assets are invested or reinvested will not affect their
character as investments (Arts. I:2, I:3).
Article II (treatment).--The BIT contains a provision
identical to that in the Model setting forth each Party's
obligation to provide the better of national or MFN treatment
to investment and associated activity of the other Party and
its right to exempt certain sectors from this obligation (Art.
The BIT also contains provisions identical to the Model as
to the minimum treatment to be accorded investments;
prohibiting arbitrary and discriminatory impairment of
investments; and requiring each Party to observe any obligation
it may have entered into with respect to an investment (Art.
The BIT also follows the Model as to entry of nationals for
investment purposes (Art. II:3); engaging top managerial
personnel of choice (Art. II:4); prohibiting performance
requirements (Art. II:5); providing effective means of
asserting claims and enforcing rights (Art. II:6); making
public all laws, regulations, administrative processes, and
adjudicatory decisions pertaining to or affecting investments
(Art. II:7); clarifying the application of the BIT on a
national treatment basis in states, territories, and
possessions of the United States (Art. II:8; removing from the
scope of MFN treatment a Party's binding obligation under free
trade areas or customs union and under any multilateral
international agreement entered into under the auspices of the
GATT subsequent to the signature of the BIT (Art. II:9).
Article III (expropriation).--The BIT is identical to the
Model's expropriation article, except for provisions addressing
the calculation of compensation and the transferability of
proceeds. While the Model provides that compensation is to be
calculated ``in a freely usable currency on the basis of the
prevailing market rate of exchange'' immediately before the
expropriatory action was taken or became known, whichever is
earlier, the BIT deletes the reference to ``freely usable
currency,'' thus making calculations dependent only on the
prevailing market of exchange at the time indicated (Art.
III:1). Further, where the Model requires the compensation be
``freely transferable at the prevailing market rate of exchange
on the date of expropriation,'' the BIT deletes the
qualification as to market exchange rates (Art. III:1).
Article IV (transfers).--Article IV of the BIT follows the
Model regarding transfers into and out of the territory of a
Party, except that it defines the term ``freely usable
currency'' and adds an obligation regarding returns in kind.
Article IV, which defines transfers to include, among other
things, compensation paid under Article III, requires in part
that transfers be made in a freely usable currency at the
current market rate of exchange on the date of transfer with
respect to spot transactions in the currency to be transferred.
The BIT provides that ``freely usable currency'' has the same
meaning that it has in Article 30 of the Articles of Agreement
of the International Monetary Fund (Art. IV:2). At this time,
these currencies include the United States dollar, Japanese
yen, German mark, French franc, and the British pound sterling.
The State Department has informed staff that this reference was
added at the request of Mongolia for the sake of clarity.
The BIT further provides that Each Party must allow returns
in kind to be made ``as authorized or specified in an
investment authorization, investment agreement, or other
written agreement between the Party and an investment or a
national or company of the other Party'' (Art. IV:4). The State
Department has informed staff that this language also was added
to ensure that U.S. investors in oil, gas, timber and other
natural resources are clearly covered.
Article V (consultations).--The BIT is identical to the
Model regarding the obligation of Parties to consult with
respect to disputes and other matters arising under the Treaty.
Article VI (investor/state disputes).--The BIT is identical
to the Model regarding provisions for consultation and
arbitration in investor-State disputes. As in the Model, each
Party consents to the submission of any investment dispute to
binding international arbitration in the event that the dispute
cannot be resolved amicably. Mongolia is a Party to the New
York Convention on the Recognition and Enforcement of Foreign
Arbitral Awards. It has entered into the Convention
reciprocally--that is, with the declaration that it will apply
the Convention to the recognition and enforcement of awards
made only in the territory of another contracting state. It has
also declared that it will apply the Convention only to
differences arising out of legal relationships, whether
contractual or not, which are considered as commercial under
its national law. Mongolia is also a Party to the Convention on
the Settlement of Investment Disputes between States and
Nationals of Other States.
Article VII (interstate disputes).--The BIT is identical to
the Model in providing for binding arbitration for interstate
disputes in the event such a dispute has not been resolved
through consultations or other diplomatic means.
Article VIII (exemptions from treaty dispute procedures).--
Like the Model, the BIT exempts from its investor/state and
interstate dispute procedures those disputes arising under the
export credit, guarantee, or insurance programs of the Export-
Import Bank of the United States or under other official
credit, guarantee or insurance arrangements pursuant to which
the Parties have agreed to other means of settling disputes.
Article IX (preservation of rights).--The BIT is identical
to the Model in allowing each Party to provide investments of
the other Party treatment that is more favorable than that
minimally required under the BIT, as a result of national laws,
regulations, administrative procedures, or adjudications,
international legal obligations, or other obligations assumed
by either Party.
Article X (exceptions).--The BIT is identical to the Model
as to exceptions for measures necessary for public order, the
fulfillment of certain international obligations, and
protecting essential security interests. Like the Model, the
BIT also allows Parties to prescribe special formalities for
investments so long as the substance of treaty rights is not
impaired. The State Department officials have informed
Committee staff that during negotiation of the BIT Parties
agreed that this provision is self-judging.
Article XI (taxation).--The BIT is identical to the Model
with respect to each Party's tax policies as applicable to
investments of the other Party and the application of the
treaty to tax matters in limited areas. No treaty provision
will impose obligations with respect to taxation, except that
(to the extent not subject to dispute settlement of a bilateral
tax treaty) investors may institute dispute proceedings with
respect to expropriations, transfers, or the enforcement of an
investment agreement or authorization.
Article XII (extent of application).--Like the Model, the
BIT clarifies that it fully applies to all political
Article XIII (final provisions).--The BIT is identical to
the Model as to its entry into force, its application to
current and future investments, termination, and continued
temporary application to investments made or acquired prior to
any termination date. As specified in the Model, the Annex and
Protocol form an integral part of the Treaty.
Annex (sectoral exemptions).--The BIT is identical to the
Model as to the sectors and matters in which the United States
may make or maintain limited exceptions from its national
treatment and MFN obligations, except for its coverage of
financial services in the national treatment paragraph (Annex,
paragraph 1, 2). Where the Model exempts primary dealership in
United States government securities, the BIT exempts
``securities and other financial services'' and eliminates the
Model's separate listing for primary dealership in United
States government securities (Annex, paragraph 1).
The Annex contains an additional paragraph listing the
sectors in which Mongolia may make or maintain limited
exceptions from its national treatment obligation (no MFN
exceptions are listed) (Annex, paragraph 3). Only land
ownership and banking are included in this exception.
Protocol (MFN and national treatment).--Unlike the Model,
the BIT contains a Protocol addressing the scope of the
treatment obligations. The Parties clarify that the national
and MFN obligations set forth in Article II, paragraph 1 of the
Treaty ``apply to the establishment and acquisition as well as
to the expansion, management, conduct, operation and sale or
other disposition of investments.''
IV. Entry Into Force and Termination
a. entry into force
The proposed treaty will enter into force 30 days after the
date of the exchange of instruments of ratification. From the
date of its entry into force, the BIT applies to existing and
The proposed treaty will continue in force for ten years
after ratification without termination. A Party may terminate
the proposed treaty ten years after entry into force if the
Party gives one year's written notice of termination to the
other Party. If terminated, all existing investments would
continue to be protected under the BIT for ten years
V. Committee Action
The Committee on Foreign Relations held a public hearing on
the proposed treaty, annex and protocol with Mongolia on
November 30, 1995. The hearing was chaired by Senator Thompson.
The Committee considered the proposed treaty, annex and
protocol with Mongolia on March 27, 1996, and ordered the
proposed treaty, annex, and protocol favorably reported by
voice vote, with the recommendation that the Senate give its
advice and consent to the ratification of the proposed treaty,
annex and protocol.
VI. Committee Comments
The Committee on Foreign Relations recommended favorably
the proposed treaty and on balance, the Committee believes that
the proposed treaty is in the interest of the United States and
urges the Senate to act promptly to give its advice and consent
to ratification. Several issues did arise in the course of the
Committee's consideration of the BIT, and the Committee
believes that the following comments may be useful to Senate
consideration of this treaty and to the State Department and
the Office of the United States Trade Representative, which
share jurisdiction over this treaty.
a. current investment statistics
investment Stock Exports Imports
1992............................................ (\1\) (\1\) 2 7
1993............................................ (\1\) (\1\) 17 36
1994............................................ (\1\) (\1\) 6 29
1995............................................ (\1\) (\1\) 14 25
\1\ No data.
United States direct investment flows to Mongolia
No data is published by the Department of Commerce
regarding U.S. direct investment which flowed from the United
States to Mongolia in the indicated calendar year. The Commerce
Department has not released its ``Survey of Current Business''
United States year-end stocks of direct investment in Mongolia
No data is published by the Department of Commerce for
Mongolia regarding the total amount of U.S. direct investment
accumulated over time as of the end of the year. The Commerce
Department has not released its ``Survey of Current Business''
United States trade with Mongolia
The trade data in the chart above for 1994 and 1995 comes
from the U.S. Bureau of Census' December 1995 press release.
Those through 1993 are taken from the International Monetary
Fund's ``Directions of Trade.'' The IMF received its trade data
for this report from the Bureau of the Census. The import data
include the cost of the imported goods, shipping insurance and
freight. Overall imports totaled $361 million and overall
exports totaled $360 million in 1993.
The Committee is encouraged by Mongolia's enactment of
domestic laws compatible with the obligations created by the
proposed treaty and encourages Mongolia to continue to enact
and to enforce laws that are favorable to foreign investors.
Recently, Mongolia passed legislation to protect private
property and foreign investments from government expropriation.
New laws also provide equal treatment for Mongolian and foreign
companies. The Committee is encouraged by the limited number of
exceptions to national treatment taken by Mongolia in the
proposed treaty and notes that Mongolia has eliminated
restrictions on currencies and profits in their domestic
legislation. The Committee believes that this treaty will
provide the tools to ensure a reduction on the restriction of
foreign investment in other sectors.
The Committee recognizes the severe difficulties faced by
Mongolia in its efforts to transform its economy from a
centrally planned to a market economy. The Committee notes the
progress of Mongolia in the areas of privatization and price
reform--in addition to its passage of market-oriented laws--and
encourages continued efforts in this area. The Committee
believes that the proposed treaty will assist Mongolia in its
work to rebuild its economy on market principles, without
outside capital no longer available since the collapse of the
Soviet Union, and to provide basic guarantees that are
essential to attracting U.S. investors.
Following the hearing on the bilateral investment treaties,
Senator Helms requested information regarding the utility of
the bilateral investment treaty with Argentina. Specifically,
Senator Helms requested that the State Department identify
outstanding investment disputes with U.S. corporations doing
business in Argentina and actions taken by the U.S. to address
the BIT violations. Since its entry into force on October 24,
1994, two disputes have developed in Argentina. The following
is excerpted from the State Department's response to Senator
\1\ Letter from Assistant Secretary for Legislative Affairs, Wendy
R. Sherman, to Senator Helms, Committee on Foreign Relations, December
We are aware of two investment disputes that have developed in
CDSI is a Maryland computer firm involved in a contract
dispute with the Cordoba provincial government in Argentina.
CDSI believes that Cordoba officials improperly reversed a
contract award to a firm with which it had a subcontract,
depriving it of the value of its investment.
Department officials have discussed the case with CDSI
representatives in Washington. Embassy officials are in regular
contact with CDSI representatives in Buenos Aires.
CDSI has informed us that, if the dispute is not resolved
through ongoing negotiations, it may avail itself of the right
to binding arbitration under the BIT. We will continue to work
with company and officials in Argentina to resolve this case.
[State Department officials have informed Committee staff
that CDSI recently reached an agreement with the provincial
government of Cordoba. According to State Department officials
the parties are satisfied with the agreement.]
Mi-Jack, based in Illinois and Texas, owns about 30% of a
company that purchased the right to operate one of five
terminals at the Port of Buenos Aires. (The rest of the equity
is not owned by Americans.) Mi-Jack is operating the dock in
accordance with regulations, fees, and labor rules specified by
the Government of Argentina in the tender.
At some point after this tender process began, the
Argentine federal government transferred adjacent dock property
to the Buenos Aires provincial government. The provincial
government leased the property to a company which began
operating a sixth terminal, without the conditions imposed on
other dock operators by the federal government. Mi-jack
maintains that this unequal treatment is a BIT violation, and
has requested USG assistance.
Department and other agency officials have discussed the
case with Mi-Jack. Our Ambassador recently urged the Argentine
Minister of Economy and the Governor of the Province of Buenos
Aires to address the issues Mi-Jack has raised and resolve the
The Committee believes that the value of the proposed
treaty depends upon the extent to which it is enforced. The
Committee refers to the two cases in Argentina, cited above, as
examples of how the proposed treaty can be a useful tool both
to business and U.S. embassies in protecting the interests of
U.S. business directly investing in-country. The Committee
believes that the treaty should serve as more than a diplomatic
tool. The Committee notes that local remedies and domestic
enforcement of arbitral awards are essential steps in enforcing
the guarantees provided in the proposed treaty and believes
that the President should communicate, at the time of the
exchange of the instruments of ratification, the importance of
a domestic enforcement regime to the ultimate success of the
proposed treaty. Such an indication would add credence to the
U.S. position that BITs provide genuine protections to
investors, and are not merely rhetorical endorsements of market
c. protecting u.s. businesses investing abroad
Although a BIT provides certain legal protections designed
to give investors recourse in the case of unfair treatment, the
role of the U.S. State Department and other government agencies
such as USTR remains essential to the protection of U.S.
citizens doing business abroad.
Issues regarding the role of the State Department and U.S.
posts abroad in assisting U.S. investors were raised during the
Committee's consideration of the BIT. After the November 30,
1995 hearing, Senator Helms requested a description of the
general procedure at U.S. Embassies, and in Washington, for
assisting U.S. investors when potential BIT violations, or
investment disputes, including expropriated property claims, in
countries not a Party to a BIT, are brought to the attention of
the Embassy by the investors. State Department's response to
this inquiry, in a letter dated December 18, 1995, \2\ is
\2\ Letter from Assistant Secretary for Legislative Affairs, Wendy
R. Sherman, to Senator Helms, Committee on Foreign Relations, December
An important responsibility of all U.S. diplomatic posts
abroad is to assist U.S. investors and property owners in the
resolution of disputes with the host government. Where disputes
arise, U.S. posts and the Department provide a range of
services to the U.S. claimant.
These services include:
(1) advising the U.S. claimant of local legal counsel
which may be available to handle similar disputes;
(2) assisting the U.S. claimant in contacting host
government officials which may be in a position to
facilitate a resolution of his claim;
(3) directly encouraging host government officials to
negotiate a resolution of the claim (such contacts may
be on behalf of a single claimant or multiple claimants
where there are a number of outstanding claims);
(4) occasionally, where the circumstances warrant,
the U.S. may decide to directly espouse a claim or
(5) in addition, where a BIT is in force, other
options (e.g. binding investor-state arbitration) may
be brought to the attention of the investor and/or
Given the wide variety of circumstances associated with
investment disputes around the globe, the range of resources
available at individual diplomatic posts, the variety of
assistance being requested by individual investors, and the
diversity of host country investment regimes, a good deal of
discretion is necessary to tailor individual responses to the
particular circumstances of the case.
For example, the approach taken in the case of a country
which has a well functioning judicial system and demonstrated
effectiveness in adjudicating disputes may be quite different
from that taken with respect to cases where some or all of
these conditions do not prevail. The investor's preferences
also guide our response. The current approach to providing
assistance to U.S. claimants in investment disputes permits us
the flexibility needed to tailor a response that reflects both
the conditions prevalent in the host country and the investor's
Action on investment disputes is coordinated through
constant routine communication among Embassy and Washington
offices. This is supplemented by periodic formal requests from
the Department for information on investment disputes and by
the Posts' preparation of the Investment Climate Statements for
each country. In addition, the Department chairs the
Interagency Staff Coordinating Group on Expropriations
(``Expropriation Group''), which is comprised of
representatives from the Office of the United States Trade
Representative, the Overseas Private Investment Corporation,
the Department of Commerce, and the Department of Treasury.
This group meets periodically to discuss expropriation and
In addition to assisting individual U.S. investors when
they have an investment dispute, we engage in activities that
could help prevent investment disputes. Officials in Washington
and in our Embassies also examine investment practices in other
nations and work to discourage other governments from passing
legislation that might disadvantage U.S. investors and lead to
investment disputes. The results of these examinations are
included in the annual Investment Climate Statement, a report
which is widely used by both U.S. officials and investors. We
also engage in negotiations with other governments on BITs and
multilateral disciplines that help protect the interests of
In the past year or two, we have reached a point where a
significant number of BITs have entered into force and, thus,
apply to U.S. investment. At this time, we are reviewing ways
to even better inform our posts about the obligations contained
in these BITs, in order to assist U.S. investors and monitor
compliance with these obligations by our BIT treaty partners.
The Committee supports the efforts of the State Department
and U.S. foreign posts to educate businesses and ensure that
the investment climate in these countries remains open and fair
for U.S. businesses. The Committee supports the BIT as a tool
for both businesses and U.S. diplomats to ensure fair
investment environments where U.S. companies are doing
In addition, Senator Helms requested an assessment of the
utility of developing procedures at the State Department to
ensure consistently timely response when investors bring
foreign investment problems to the attention of U.S. Posts and
the Department. State Department's response to this inquiry,
was also included in the dated December 18, 1995 letter, as
It is current State Department policy and practice to
respond in a timely manner when investors bring investment
problems to the attention of embassies. Any lapse in such
practice can and should be brought to the attention of the
Office of Investment Affairs in Washington, which will ensure
that a response is forthcoming.
While a timely response should be a constant, we believe
that the nature of that response should vary from case to case.
Investors benefit from the freedom our diplomats enjoy to
pursue solutions tailored to the investor's problems. In some
countries, a quiet call from an Embassy officer to a government
official can help an investor. Elsewhere, if the government has
not been responsive, we may directly approach senior government
The following examples illustrate the variety and
complexity of individual circumstances.
A company informed us of an investment dispute, but
specifically requested that we not take any action as
In a country undergoing civil strife, investors are
pursuing arbitration through an international financial
In one country, we have had to develop specialized
procedures and increase Embassy staffing to deal with a
very large number of claims.
Supplanting our existing flexible process for assisting
U.S. claimants with a ``one size fits all'' policy would not
likely work to the benefit of investors. Investors gain when we
are free to fashion a response that takes into consideration
the facts unique to that dispute, the investor's strategy for
obtaining resolution to the dispute, the resources available to
the USG to promote a quick resolution to the dispute, and the
broader economic and political context within which we and the
investor must work to achieve the desired outcome.
As described in the previous question, American diplomats
and Department employees use a wide variety of strategies to
assist U.S. citizens in investment disputes abroad. Required
procedures could have significant resource implications without
increasing the effectiveness of these strategies. Furthermore,
we do not believe that a procedure developed in Washington
which may not reflect either the unique conditions existing in
a particular country or the experiences of our diplomats or
businessmen is in the interests of either U.S. investors or the
The Committee agrees that a ``one size fits all'' approach
to addressing how best to protect U.S. investors faced with
disputes with foreign governments would not be useful. However,
the Committee supports the development by State and USTR of
flexible procedures that ensure that all U.S. investors, large
and small, will be given timely assistance when they raise
investment issues with the U.S. State Department, both at the
missions and in Washington. The Committee expects that such
procedures would ensure appropriate coordination between U.S.
missions and the State Department and the Office of the U.S.
Trade Representative in Washington.
VII. Explanation of Proposed Treaty and Protocol
For a detailed article-by-article explanation of the
proposed bilateral investment treaty, annex, and protocol, see
the analysis contained in the transmittal documents included in
Treaty Doc. 104-10.
VIII. Text of the Resolution of Ratification
Resolved, (two-thirds of the Senators present concurring
therein), That the Senate advise and consent to the
ratification of the Treaty Between the United States of America
and Mongolia Concerning the Encouragement and Reciprocal
Protection of Investment, with Annex and Protocol, signed at
Washington on October 6, 1994 (Treaty Doc. 104-10).