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108th Congress                                               Exec. Rpt.
                                 SENATE
 2nd Session                                                    108-014

======================================================================



 
CONVENTION ON INTERNATIONAL INTERESTS IN MOBILE EQUIPMENT AND PROTOCOL 
               ON MATTERS SPECIFIC TO AIRCRAFT EQUIPMENT

                                _______
                                

                 July 16, 2004.--Ordered to be printed

                                _______
                                

           Mr. Lugar from the Committee on Foreign Relations,
                        submitted the following

                              R E P O R T

                   [To accompany Treaty Doc. 108-10]

    The Committee on Foreign Relations, to which was referred 
the Convention on International Interests in Mobile Equipment 
and Protocol on Matters Specific to Aircraft Equipment (Treaty 
Doc. 108-10) (hereafter ``Convention'' and ``Protocol''), 
signed at Cape Town on November 16, 2001, having considered the 
same, reports favorably thereon 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.

                                CONTENTS

                                                                   Page
  I. Purpose..........................................................2
 II. Background.......................................................2
III. Summary of Key Provisions of the Convention and Protocol.........2
 IV. Implementing Legislation.........................................3
  V. Committee Action.................................................4
 VI. Committee Recommendation and Comments............................4
VII. Text of Resolution of Ratification...............................5
VIII.Appendix--Hearing entitled ``Economic Treaties,'' Thursday, April 
     1, 2004, before the Committee on Foreign Relations...............7

                               I. Purpose

    The Convention and accompanying Protocol establish an 
international legal framework for the creation, priority, and 
enforcement of security and leasing interests in mobile 
equipment--specifically high value aircraft equipment 
(airframes, aircraft engines, and helicopters)--and create a 
worldwide international registry where such interests can be 
registered.

                             II. Background

    The Convention and Protocol were negotiated over a five-
year period under the auspices of the International Institute 
for the Unification of Private Law (UNIDROIT) and the 
International Civil Aviation Organization (ICAO). Work on the 
Convention was completed in November 2001, and the documents 
were opened for signature at a Diplomatic Conference held at 
Cape Town, South Africa, on November 16, 2001. The United 
States signed the Convention in Rome on May 9, 2003.
    The Convention is designed to promote the use modern 
financing practices in international transactions for the sale 
and lease of high-value mobile equipment. The Convention 
contains rules for establishing recognized rights associated 
with international financing and leasing transactions that are 
similar to the rules and rights commonly used in the United 
States under certain articles of the Uniform Commercial Code. 
The Convention also provides for a central, international 
registry through which various rights and priorities in covered 
property may be determined. Provisions with respect to remedies 
and procedures for enforcing rights further add to the 
predictability of international transactions and to the 
autonomy of the parties to them. The Convention does not affect 
U.S. export and technology controls or regulatory procedures 
relating to national security that may apply to items at issue 
in such transactions.
    While the Convention creates a framework for transactions 
in three categories of equipment--aircraft equipment, railway 
rolling stock, and space assets--the Convention does not come 
into force with respect to any specific category absent a 
separate protocol dealing with that category. To this end, the 
Convention is accompanied by the Aircraft Protocol, which 
contains rules particular to financing practice for airframes, 
aircraft engines, and helicopters.
    By facilitating international transactions in modern 
equipment, the Convention is expected to lead to broad and 
mutual economic benefits for all interested parties and to the 
expanded use of newer, safer technologies.

     III. Summary of Key Provisions of the Convention and Protocol

    A detailed article-by-article discussion of the Convention 
and Protocol may be found in the Letter of Submittal from the 
Secretary of State to the President, which is reprinted in full 
in Treaty Document 108-10. A summary of the key provisions of 
the Convention and Protocol is set forth below.

Creation and Registration of Interests

    The Convention establishes rules that would apply to 
transactions for the financing of large mobile equipment 
between creditors and debtors in countries that are party to 
the Convention. Articles 2 and 7 provide for the creation of an 
international interest held by a creditor in an item of large 
mobile equipment. Such interests are used to provide security 
to creditors lending money to finance the purchase or lease of 
equipment. Article 16 establishes an International Registry 
where such interests, and transactions related to such 
interests (such as assignments or subordinations), may be 
registered. Chapter V of the Convention addresses other issues 
related to the registration system, including requirements for 
registration of international interests, validity of 
registrations, and provisions for the public to search 
information relating to registered interests.

Creditors' Remedies for Default

    The Convention establishes remedies available to creditors 
in the event of a default on an agreement covered by the 
Convention. Under Article 8, subject to any agreement between 
the parties to the transaction, these remedies may include 
taking possession of the item in which the creditor has an 
interest, selling or granting a lease of the item, and 
collecting or receiving any income or profits arising from the 
management or use of the object. Such remedies must be 
exercised in a commercially reasonable manner. Article 13 
provides for additional remedies to preserve the interests of a 
creditor who adduces evidence of a default by a debtor, pending 
a final determination of the creditor's claim.

Priority and Assignment

    Article 29 of the Convention contains rules to establish 
priorities among multiple interests in the same item. Articles 
31 and 32 establish requirements for the assignment of 
interests under the Convention and the effect of such 
assignments.

Aircraft Protocol

    The Aircraft Protocol provides for the Convention's 
application to transactions related to airframes, aircraft 
engines, and helicopters. It provides additional remedies to 
creditors in the event of default beyond those contained in the 
Convention, including the right to procure de-registration of 
an aircraft by relevant aviation regulation authorities, and 
the right to procure the physical transfer of an aircraft from 
the territory in which it is situated. It also contains 
additional provisions for remedies in the event of a debtor's 
insolvency.

                      VI. Implementing Legislation

    No implementing legislation is required for the Convention 
or Protocol, except for technical amendments to certain 
authorities of the Federal Aviation Administration relating to 
the filing of interests in registries through the FAA. The 
Administration submitted proposed legislation on November 18, 
2003, and this legislation is currently under consideration in 
both the Senate and the House of Representatives.
    As noted in the Administration's response to a question for 
the record from Senator Biden, the Convention and Protocol 
provide for private rights of action based on their provisions 
in the courts of States parties to them.

                          V. Committee Action

    The Committee on Foreign Relations held a public hearing on 
the Convention and Protocol on April 1, 2004 at which it heard 
testimony from the Departments of State and Transportation (a 
transcript of this hearing and questions and answers for the 
record may be found in the appendix to this report). On June 
22, 2004, the Committee considered the Convention and Protocol 
and ordered them favorably reported by a voice vote, with the 
recommendation that the Senate give its advice and consent to 
their ratification, subject to declarations contained in the 
resolution of advice and consent.

               VI. Committee Recommendation and Comments

    On balance, the Committee on Foreign Relations believes 
that the proposed Convention and Protocol are in the interest 
of the United States and urges that the Senate act promptly to 
give advice and consent to their ratification, subject to the 
declarations contained in the resolution of advice and consent 
to ratification. The Committee notes the support for the 
Convention and Protocol expressed by the U.S. aircraft 
manufacturing industry, financial services entities involved in 
aircraft financing, the American Bar Association, and the Air 
Transport Association.
    The proposed declarations to the Convention are designed to 
preserve current U.S. practices with respect to priority of 
non-consensual rights arising by law, to preserve the ability 
of the U.S. Government and other specified entities to detain 
aircraft in order to secure amounts owing in connection with 
the provision of certain public services, and to permit the 
exercise of certain remedies without the leave of the court, 
consistent with U.S. law. The first three proposed declarations 
to the Protocol provide that the United States will apply 
provisions of the Protocol addressing contractual choice of 
law, insolvency case assistance, and requests for the 
deregistration and export of aircraft. The fourth declaration 
provides for the designation of the Federal Aviation 
Administration as the exclusive entry point in the United 
States entitled to authorize electronic registrations under the 
Protocol relating to airframes pertaining to U.S. registered 
aircraft and helicopters, and as the non-exclusive point 
authorizing electronic registrations relating to engines.

                VII. Text of Resolution of Ratification

    Resolved (two-thirds of the Senators present concurring 
therein),

SECTION 1. SENATE ADVICE AND CONSENT SUBJECT TO DECLARATIONS.

    The Senate advises and consents to the ratification of the 
Convention on International Interests in Mobile Equipment 
(hereafter in this resolution referred to as the 
``Convention'') and the Protocol to the Convention on 
International Interests in Mobile Equipment on Matters Specific 
to Aircraft Equipment (hereafter in this resolution referred to 
as the ``Protocol''), concluded at Cape Town, South Africa, 
November 16, 2001 (T. Doc. 108- 10), subject to the 
declarations of section 2 and section 3.

SEC. 2. DECLARATIONS RELATIVE TO THE CONVENTION.

    The advice and consent of the Senate under section 1 is 
subject to the following declarations relative to the 
Convention:
          (1) Pursuant to Article 39 of the Convention--
                  (A) all categories of non-consensual rights 
                or interests which under United States law have 
                and will in the future have priority over an 
                interest in an object equivalent to that of the 
                holder of a registered international interest 
                shall to that extent have priority over a 
                registered international interest, whether in 
                or outside insolvency proceedings; and
                  (B) nothing in the Convention shall affect 
                the right of the United States or that of any 
                entity thereof, any intergovernmental 
                organization in which the United States is a 
                member State, or other private provider of 
                public services in the United States to arrest 
                or detain an aircraft object under United 
                States law for payment of amounts owed to any 
                such entity, organization, or provider directly 
                relating to the services provided by it in 
                respect of that object or another object.
          (2) Pursuant to Article 54 of the Convention, all 
        remedies available to the creditor under the Convention 
        or Protocol which are not expressed under the relevant 
        provision thereof to require application to the court 
        may be exercised, in accordance with United States law, 
        without leave of the court.

SEC. 3. DECLARATIONS RELATIVE TO THE PROTOCOL.

    The advice and consent of the Senate under section 1 is 
subject to the following declarations relative to the Protocol:
          (1) Pursuant to Article XXX of the Protocol--
                  (A) the United States will apply Article VIII 
                of the Protocol;
                  (B) the United States will apply Article XII 
                of the Protocol; and
                  (C) the United States will apply Article XIII 
                of the Protocol.
          (2)(A) Pursuant to Article XIX of the Protocol--
                  (i) the Federal Aviation Administration, 
                acting through its Aircraft Registry, FAA 
                Aeronautical Center, 6400 South MacArthur 
                Boulevard, Oklahoma City, Oklahoma 73125, shall 
                be the entry point at which information 
                required for registration in respect of 
                airframes or helicopters pertaining to civil 
                aircraft of the United States or aircraft to 
                become a civil aircraft of the United States 
                shall be transmitted, and in respect of 
                aircraft engines may be transmitted, to the 
                International Registry; and
                  (ii) the requirements of chapter 441 of title 
                49, United States Code, and part 49 of title 
                14, Code of Federal Regulations, shall be fully 
                complied with before such information is 
                transmitted at the Federal Aviation 
                Administration to the International Registry.
          (B) For purposes of the designation in subparagraph 
        (A)(i) and the requirements in subparagraph (A)(ii), 
        information is transmitted at the Federal Aviation 
        Administration in accordance with procedures 
        established under United States law.
          (C) In this paragraph, the term ``civil aircraft of 
        the United States'' has the meaning given that term in 
        section 40102(17) of title 49, United States Code.
                             VIII. Appendix

                              ----------                              


                           ECONOMIC TREATIES

                              ----------                              


                                CONTENTS

                                                                    Page

Aviation Working Group, letter with appendices, to Chairman 
    Richard G. Lugar, stating support for the Cape Town Convention 
    and the Aircraft Protocol, dated March 29, 2004...............    31
Donnelly, Hon. Shaun E., Acting Assistant Secretary of State, 
    Bureau of Economic and Business Affairs, U.S. Department of 
    State, Washington, DC.........................................     9
    Prepared statement............................................    11
    Response to an additional question for the record from Senator 
      Lugar.......................................................    27
    Responses to additional questions for the record from Senator 
      Biden.......................................................    28
General Electric Company, GE Aircraft Engines, statement submitted 
    for the record by David L. Calhoun, president and chief 
    executive officer, dated March 29, 2004.......................    32
Lugar, Hon. Richard G., U.S. Senator from Indiana, opening 
    statement.....................................................     7
Pratt & Whitney, a United Technologies Company, letter to Chairman 
    Richard G. Lugar, stating support for the Cape Town Convention 
    and the Aircraft Protocol, dated March 30, 2004...............    33
Rosen, Hon. Jeffrey, General Counsel, U.S. Department of 
    Transportation, Washington, DC................................    17
    Prepared statement............................................    18

                              ----------                              


                        THURSDAY, APRIL 1, 2004

                                        U.S. Senate
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:30 a.m. in Room 
SD-419, Dirksen Senate Office Building, Hon. Richard G. Lugar 
(chairman of the committee), presiding.
    Present: Senator Lugar.

        OPENING STATEMENT OF SENATOR RICHARD G. LUGAR, CHAIRMAN

    The Chairman. This hearing of the Senate Foreign Relations 
Committee is called to order. Today, the Foreign Relations 
Committee will review various economic treaties, including the 
Convention on International Interests in Mobile Equipment and 
the Protocol on Matters Specific to Aircraft Equipment. These 
agreements are better known as the Cape Town Convention, 
because they were negotiated in Cape Town, South Africa in 
2001.
    In addition, we will address protocols amending United 
States Bilateral Investment Treaties with eight Eastern 
European nations. All of the agreements pending before us today 
are significant in that they promote trade and economic 
cooperation.
    Economic treaties and investment agreements are important 
tools in generating new commercial opportunities for United 
States businesses and in advancing United States foreign 
policy. Cooperation on the commercial front enhances our 
ability to work with other nations on security and political 
matters. Our committee is committed to reviewing expeditiously 
the economic agreements negotiated by the administration.
    The Cape Town Convention will facilitate purchasing and 
leasing of large commercial aircraft and aircraft engines by 
foreign entities that otherwise might be unable to arrange 
sufficient financing. Aircraft customers in foreign countries 
that implement the Convention will be eligible for lower cost 
loans from the United States Export-Import Bank when they seek 
to buy or to lease United States commercial aircraft. These 
incentives to foreign customers will help open new markets to 
United States aircraft manufacturers.
    Simultaneously, the Convention creates internationally 
recognized finance rights and enforceable remedies that will 
improve the security of aircraft financing. This is essential 
in many developing markets where conducting large commercial 
transactions is risky, and where obtaining adequate security 
for United States financiers is otherwise difficult.
    The Cape Town Convention was negotiated to be consistent 
with United States commercial and insolvency laws, and it 
reaffirms existing obligations under these bodies of United 
States law. Ratification of the Convention by the United States 
likely will stimulate other nations to ratify it, as well. 
Expanding the list of nations that participate in the 
Convention would provide a needed boost to our aircraft 
industry and to the broader goal of promoting commerce with 
developing nations.
    In addition to the Cape Town Convention, today we will 
review protocols that amend existing Bilateral Investment 
Treaties, or BITs, with eight Eastern European countries. Six 
of the eight nations, the Czech Republic, Estonia, Latvia, 
Lithuania, Poland, and the Slovak Republic, are expected to 
join the European Union on May 1, 2004, a month from now. 
Bulgaria and Romania are expected to join the EU in 2007.
    Each of the Protocols is based on a similar understanding 
reached between the United States, the European Commission, and 
the subject countries. The goal of these understandings is to 
preserve the effect and intent of existing Bilateral Investment 
Treaties between the United States and each of the subject 
countries after their accession to the European Union. The 
protocols create a legal framework and enhanced consultation 
for avoiding inconsistencies between the BIT obligations of the 
eight nations and their European Union membership.
    The United States supports the enlargement of the European 
Union. At the same time, we believe that the continued 
existence of Bilateral Investment Treaties with countries 
poised to join that body will be mutually beneficial to 
investors on both sides of the Atlantic. We want to encourage 
economic growth in these nations, which is a key to solidifying 
their young democratic institutions.
    We also want to encourage the growth of new capital markets 
that can provide United States firms with productive business 
partners. It is a pleasure to welcome our panel of witnesses. 
Shaun Donnelly is Acting Assistant Secretary of the State 
Department's Bureau of Economic and Business Affairs, and Jeff 
Rosen is General Counsel of the U.S. Department of 
Transportation. We look forward to your insights on these 
important economic treaties.
    And gentlemen, I would just say parenthetically that the 
committee has been pleased to have success on the floor 
following similar hearings. Your labors today hopefully will be 
productive in the same way. We are very pleased that our 
colleagues have in fact passed on the Senate floor the United 
States-Japanese tax treaty, and likewise the tax treaty with 
Sri Lanka in recent days. The former of these treaties was 
especially important because of action that needed to be taken 
by the Japanese Diet in a timely way so that tax years 
coinciding in Japan and the United States made possible very 
substantial savings for a large number of American firms.
    That is often the case with tax treaties, but this 
particular one was large in its impact because of the size of 
the Japanese economy, as well as the number of ties that we 
have. Furthermore, although this is not a tax or commercial 
treaty, I am pleased to announce for the benefit of members and 
staff that last night, fairly late last night, on the floor of 
the Senate, the IAEA protocol was passed. This is the 
International Atomic Energy Protocol, which the President 
specifically asked for in his speech on non-proliferation at 
the National Defense University, just a short time ago.
    I was present for the speech, in the front row, and the 
President looked at me and indicated that the Senate ought to 
take action promptly. We had been taking action, but it 
prompted me to reply respectfully that within the President's 
administration people needed to get their act together and to 
find a common theme, which they did. And so all's well that 
end's well.
    The process moved along swiftly, and it's very important 
that the IAEA deals, and is dealing, now with Iran, with Libya, 
and with other situations that are not hypotheticals, but that 
in the real world are extremely important. I mention these as 
successes, not just for the committee but also for the Senate, 
for the country. We are working with the administration, just 
as we seek to do with you gentlemen today.
    We are very, very pleased that you are here, and I would 
like to call upon you, Mr. Donnelly to testify first, and then 
Mr. Rosen. Let me say at the onset that your full statement to 
the committee will be made a part of the record, in full. You 
may proceed in any way you wish.

STATEMENT OF HON. SHAUN E. DONNELLY, ACTING ASSISTANT SECRETARY 
    OF STATE, BUREAU OF ECONOMIC AND BUSINESS AFFAIRS, U.S. 
                      DEPARTMENT OF STATE

    Mr. Donnelly. Thank you very much, Mr. Chairman, before I 
say anything about the business, I want to thank you on behalf 
of Secretary Powell and the administration for the leadership 
you've been showing on the efforts you just mentioned, the 
Japan and Sri Lanka tax treaties. I was the former U.S. 
Ambassador in Sri Lanka, so I have a particular interest in 
that one, but the timely action on the Japan treaty is very 
important and also on the IAEA Protocol.
    Mr. Chairman, I very much appreciate the opportunity to 
appear here today to recommend on behalf of the administration 
favorable action on the Cape Town Convention on International 
Interests in Mobile Equipment, and the protocols amending eight 
Bilaterial Investment Treaties pending before the committee. 
I'd add parenthetically that as a fellow Hoosier, I 
particularly appreciate the opportunity to appear before you, 
Mr. Chairman.
    The Chairman. Very nice to have you here.
    Mr. Donnelly. Well, thank you, sir. I'm accompanied by my 
college from the Department of Transportation, General Counsel 
Jeff Rosen, representatives from the Export-Import Bank, the 
Federal Aviation Administration, and industry representatives. 
We appreciate very much the committee's interest in these 
treaties as demonstrated by the prompt scheduling of this 
hearing.
    As you know, Mr. Chairman, the administration is dedicated 
to facilitating trade and the expansion of commerce across all 
borders. And the treaties we're considering today will promote 
expanded trade and investment, support American companies, 
create American jobs, and advance our economic interests.
    Mr. Chairman, the Cape Town Convention on International 
Interest in Mobile Equipment and the related protocol on 
Aircraft Equipment will extend modern commercial finance laws 
already in place in the U.S., to international transactions 
involving high value mobile equipment. This treaty will make 
available the benefits of these finance laws to our trading 
partners all over the world resulting in lower risks, and an 
expanded array of credit services, thereby increasing business 
transactions, manufacturing activity, and employment growth.
    The Convention and Protocol are fully supported by the U.S. 
industry, and the key government agencies involved, and the 
negotiating process has really been a model of public, private 
partnership. All Federal agencies with interest in this treaty, 
the Departments of State, Transportation, Commerce, the FAA, 
and the U.S. Export-Import Bank worked very closely with the 
affected private sector to ensure that U.S. positions were in 
line with the needed results.
    Mr. Chairman, we respectively request Senate ratification 
of this Convention and Protocol. These instruments represent a 
positive step forward in international commercial law and in 
our economic and commercial interests. Early Senate approval 
will reaffirm U.S. leadership in this key area.
    Mr. Chairman, I'd now like to turn to the second item of 
business before the committee today, as you summarized, our 
Bilateral Investment Treaties with acceding and candidate 
countries to the European Union. Bilateral Investment Treaties 
or BITs are a key part of the framework for U.S. investment in 
eight of the countries that are now seeking membership in the 
EU, the Czech Republic, Estonia, Latvia, Lithuania, Poland, and 
the Slovak Republic, all of which will join the EU on May 1, as 
well as Bulgaria, and Romania which are candidates, as you 
said, for accession in 2007.
    During the last 2 years BITs have afforded important 
protections to U.S. investors in these countries. U.S. 
investors in turn have played an important role in those 
countries' economic transformation. U.S. investment in the 
region will benefit even more once these countries accede to 
the EU, as enlargement fosters stronger regional economic 
integration and expanded economic opportunities.
    However, certain aspects of the Bilateral Investment 
Treaties may conflict with obligations these countries will 
take on upon entry into the European Union. Under EU law member 
states are required to bring their commitments under 
preexisting international agreements into conformity with EU 
law. In addition, the acts of accession of these countries 
acceding on May 1 require that prior to that time they either 
eliminate any such incompatibilities or withdraw from such 
agreements.
    Therefore, to the extent necessary to maintain 
compatibility with EU legal obligations, we were willing to 
make adjustments in certain provisions of these BITs in a form 
compatible with EU obligations in order to preserve the vital 
protections that these treaties otherwise provide for U.S. 
investors.
    In addition, we also obtained important assurances from the 
European Commission about the protection of existing U.S. 
investors in these countries, and the right under the E.C. 
treaty of U.S. investors, once they are established in one EU 
member state, to invest onward without hindrance in other 
members of the EU. When viewed together with the benefits of 
enlargement, these steps actually represent a significant gain 
for U.S. investors.
    Mr. Chairman, in closing, I would say again that the 
Protocols amending the Bilateral Investment Treaties and the 
Cape Town Convention under consideration today will help grow 
the American economy, produce new jobs, and strengthen economic 
relations with new and existing trading partners. We believe 
that expanding markets overseas is good for American 
entrepreneurs and American workers. The amendments to the BITs 
will support continued U.S. investment and growth in a large 
European Union. And the Cape Town Convention will facilitate 
financing the sale of major American products to the four 
corners of the globe, particularly in the developing world.
    We urge your committee to take prompt and favorable action 
on these treaties. I thank the committee and you, Mr. Chairman, 
for its continuing interest in these matters. And the members 
and staff for devoting the time and attention to review these 
treaties so promptly. I'd be very happy to try and answer any 
questions that you may have. Thank you.
    [The prepared statement of Mr. Donnelly follows:]

              Prepared Statement of Hon. Shaun E. Donnelly

    Mr. Chairman and distinguished Members of the Committee, I 
appreciate the opportunity to appear today at this hearing to 
recommend, on behalf of the Administration, favorable action on the 
Cape Town Convention on International Interests in Mobile Equipment and 
on the Protocols amending eight Bilateral Investment Treaties that are 
pending before this Committee. We appreciate the Committee's interest 
in these treaties as demonstrated by the scheduling of this hearing.
    The Administration is dedicated to facilitating trade and the 
expansion of commerce across all borders. We seek to accomplish this 
through a number of means. We recently concluded negotiating free trade 
agreements with our neighbors in Central America and the Dominican 
Republic, as well as with Morocco and Australia and certainly hope 
these agreements will receive favorable consideration from the 
Congress. The treaties we are considering today will also promote 
expanded trade and investment, support American companies and advance 
our economic interests.
    Mr. Chairman, the Cape Town Convention on International Interests 
in Mobile Equipment, and the related Protocol on Aircraft Equipment, 
will extend modern commercial finance laws, already in place in the 
U.S., to international transactions involving high value mobile 
equipment. This treaty will make available the benefits of these 
finance laws to our trading partners all over the world, resulting in 
lower risks and making available an expanded array of credit services. 
This, in turn, will increase business transactions, manufacturing 
activity and growth in employment.
    The eight Bilateral Investment Treaties, or BITS as they are 
frequently called, are a key part of the machinery that established a 
framework for U.S. investment in countries that are now seeking 
membership in the European Union. U.S. investors have played an 
important role in the economic transformation of the Czech Republic, 
Estonia, Latvia, Lithuania, Poland, and the Slovak Republic, which will 
join the European Union (EU) on May 1--as well as with Bulgaria and 
Romania, which are candidates for EU accession in 2007. During the last 
few years, these BITs have provided a stable framework for investment 
and afforded important protections to U.S. investors in these 
countries. U.S. investment in the region, in turn, will benefit even 
more once these countries accede to the EU, as enlargement fosters 
stronger regional economic integration and expanded economic 
opportunities. However, certain aspects of these treaties may conflict 
with obligations these counties will take on upon entry into the 
European Union. Following lengthy and productive negotiations with the 
European Commission and with the acceding and candidate countries, we 
are submitting for your consideration, Protocols to amend our BITs with 
these nations, which will preserve many of the benefits of the original 
treaties in a form compatible with their accession to the EU.

                   CAPE TOWN CONVENTION--WHAT IS IT?

    Mr. Chairman, the President transmitted the Cape Town Convention 
and the related Protocol on Aircraft Equipment to the Senate on 
November 5, 2003. There is a detailed explanation of the Convention and 
Protocol as well as a chapter-by-chapter analysis in the Report by the 
Secretary of State, attached to the President's transmittal of the 
Convention. While it is not summarized here we will be happy to respond 
to any questions the Committee may have.
    The Convention and Protocol will extend modern commercial finance 
laws, already in place in the United States, to international 
transactions in other countries. These laws are a proven quantity and 
have worked well in our capital markets and in international 
transactions involving high value mobile equipment--including aircraft 
and related equipment--the specific concern of this Protocol. This 
Convention will increase for many other countries the availability of 
credit and lower the risks of commercial credit, thereby expanding 
business activity in sectors affected by this treaty. This treaty will 
directly support increased manufacturing and employment in aircraft 
frame production, avionics, aircraft engines, aircraft parts, supplies 
and services. This treaty will have a marked impact on the markets for 
these products and services in developing and emerging countries, where 
the greatest expansion in sales is expected to occur over the next 10 
to 20 years. This treaty will make asset-based financing available in 
these emerging countries where today such commercial law and the 
associated credit may not be adequate and where credit and country risk 
are obstacles.
    The Cape Town Convention does this by adopting modern asset-based 
financing and assignment of payment rights financing concepts. These 
principles are reflected in the U.S. Uniform Commercial Code (UCC), 
which grants enhanced legal rights in the aircraft (or other mobile 
items) rather than relying on company or country risk. This permits the 
lender to compensate for other factors that would drive risk and credit 
cost up or sharply limit credit altogether and has fueled commercial 
finance in the United States, in particular aircraft finance. As a 
result the U.S. is the preferred finance market for aviation in the 
world.
    The Convention and Protocol are fully supported by industry and the 
key government agencies involved. The negotiation process can be seen 
as a model for public-private sector partnership. All federal agencies 
concerned with this treaty: the Departments of State, Transportation, 
Commerce, and the Federal Aviation Administration (FAA) and U.S. 
Export-Import Bank, worked closely with the affected private sector. 
These included manufacturers, suppliers, secured lenders, financial 
lessors, aircraft leasing organizations, credit rating organizations, 
aircraft registry interests and others. This was done in order to be 
sure that U.S. positions were in line with needed results. Key 
associations such as the Air Transportation Association (ATA), the 
Aircraft Working Group (AWG), the Aircraft Title Lawyers Association 
(ATLA) and others have also supported this Convention.
    The Convention will come into force April 1, 2004, (coincidentally 
the date of this Hearing) with three ratifying States. However, the 
Convention will not apply to aircraft until the Protocol also comes 
into force, which requires ratification by eight States. Currently, 
four countries have ratified the Convention and Protocol. We expect 
that four additional ratifications are likely to occur by the fall, and 
the Protocol is expected to come into force by the end of calendar year 
2004.
    why do we need it?--the importance of u.s. commercial leadership
    Mr. Chairman, the U.S. is widely recognized as the leader of this 
effort and the timing of Senate action and early U.S. ratification will 
be a powerful signal of our strong support for the Convention and 
Protocol. Early ratification will position the U.S. to fully protect 
the considerable interests our industries have in assuring that the 
early stages of implementation are handled correctly. U.S. 
manufacturing and financing interests have placed strong importance on 
early ratification in order to provide a boost in sales in aircraft 
frames and engines. With a sharp and severe downturn in aircraft and 
aircraft engine sales in the last several years, reviving this market 
has taken on much greater importance. The treaty will facilitate the 
acquisition of newer, safer aircraft and help developing countries 
without private capital. The prospect that this new treaty will be in 
place in the near future has already been reflected in the U.S. Export-
Import Bank's preferential exposure fee terms for borrowers from 
countries that ratify and implement the Convention and Protocol. 
Several major sales of U.S. equipment have been made or will be made 
based on the expectation of other countries that the U.S. will ratify 
the treaty.
    Mr. Chairman, there are other aspects to the Convention that should 
be noted. First the negotiation of this Convention was a part of a 
multi-year effort by the Department of State, with other agencies and 
the private sector, to conclude new agreements reflecting modern 
commercial law already in place in the U.S. The purpose is not to 
export our laws, but rather to export market-tested financing concepts, 
which can serve to increase economic capacity in States at all levels 
of development. We have been joined in that effort by a number of 
international financial institutions. This has led to the completion 
also in 2001 of the new United Nations Commission on International 
Trade Law (UNCITRAL) Convention on accounts receivable financing, 
negotiated in parallel with the Cape Town Convention and which the 
United States signed on December 30, 2003; the 2002 Organization of 
American States (OAS) new Model Inter-American Law on secured Finance, 
and the 2002 Hague Conference Convention on Securities Intermediaries. 
We believe that adoption of these instruments can significantly 
increase economic capacity, especially in developing countries.
    Finally, Mr. Chairman there is the significance of holding the 
diplomatic conference itself in South Africa. As stated by South 
African officials at the outset of the Cape Town Conference in October 
2001, ``this marks the first time that a multilateral negotiation has 
taken place on complex commercial law in the sub-Saharan region.'' The 
decision to do that was taken by the cohosts of the Conference, 
UNIDROIT and the International Civil Aviation Organization (ICAO), with 
the support of the U.S. government. The State Department hopes this 
will be a precedent that will lead to more active participation by 
major developing countries in commercial law reform.

                  PROCEDURAL AND IMPLEMENTATION ISSUES

    To obtain the full benefits of the Convention and Protocol, the 
U.S. needs to ratify both. To fully implement the Protocol, the U.S. 
must also enact technical amendments to FAA authority concerning 
registry functions under the Protocol. These amendments were 
transmitted last November to Congress by Secretary of Transportation 
Norm Mineta. They have been vetted through the Departments of 
Transportation, State, and Commerce and are supported by aircraft and 
engine manufactures, air finance interests, and other key associates. 
We are hopeful for timely action on these amendments, but if they are 
not enacted by the time the Senate acts on the Treaty, the U.S. could 
deposit the instrument of ratification to the Convention itself, but 
postpone depositing the instrument for the Protocol until the 
amendments are enacted.
    The fmancing provisions on secured interests do not require any 
implementing legislation, state or federal, since the basic concepts of 
the Convention and Protocol were drawn from the uniform state law in 
the U.S. (Uniform Commercial Code Article 9 on secure finance). To 
assure coordination, experts from the National Conference of 
Commissioners on Uniform State Laws and the American Bar Association's 
(ABA) Business Law Committee have been closely involved at all stages 
during the development of this legislation. The ABA's House of 
Delegates has endorsed early ratification of the new treaty system.
    There are no budget implications or appropriations required. There 
is no cost to the government for implementation of the private 
transactional financing provisions and we anticipate only minor cost to 
set up the FAA interface to the new registry system, which will be 
absorbed in the FAA's regular operating budget for the Monroney Center 
at Oklahoma City.
    The Convention and Protocol permit optional declarations; several 
are recommended for the United States upon ratification and are listed 
in the Report transmitted to Congress. These optional declarations 
preserve our existing fmancing system and designate the FAA as the 
entry point for the U.S. filings in a new international registry.
    The Convention and Protocol have specific provisions that intersect 
with certain other conventions. But neither will have any effect on 
U.S. export and technology controls or regulatory procedures relating 
to national security that would otherwise apply to such a transaction.
    Mr. Chairman, we respectfully request Senate ratification of the 
Convention and Protocol. These instruments represent a positive step 
forward in international commercial law and are in our economic and 
commercial interest. Early Senate approval will reaffirm U.S. 
leadership in this area.

           U.S. BITS WITH EU ACCEDING AND CANDIDATE COUNTRIES

    Mr. Chairman, I would like to now turn to the second item of 
business before the Committee today, our bilateral investment treaties 
with EU acceding and candidate countries. U.S. investors have played an 
important role in the economic transformation of Eastern Europe. U.S. 
bilateral investment treaties (or BITs) with six acceding countries, 
the Czech Republic, Estonia, Latvia, Lithuania, Poland, and the Slovak 
Republic, and two candidate countries, Bulgaria and Romania, have 
provided a stable framework for investment and afforded important 
protections to U.S. investors. It is for this reason we intend to 
preserve these treaties as these countries become new members of the 
European Union. U.S. investors in the region, in turn, will benefit 
from these countries' accession to the EU, as enlargement will foster 
regional economic integration and expand the markets for U.S.-owned 
firms.
    Member States of the European Union, however, are required under EU 
law, including the Treaty Establishing the European Community (the EC 
Treaty), to take steps to bring their commitments under pre-existing 
international agreements into conformity with their obligations as 
members of the EU. In particular, the Acts of Accession of the 
countries that will become members of the EU on May 1 of this year 
require that, prior to that time, they either eliminate any 
incompatibilities between pre-existing international agreements and 
obligations of EU membership, or withdraw from such agreements.
    As a result of discussions that began in early 2002, a political 
understanding was reached on September 22, 2003, among the United 
States, the European Commission and the six acceding and two EU 
candidate countries. It provides a roadmap for avoiding 
incompatibilities between these countries' obligations as EU Member 
States and their obligations under their BITs with the United States. 
The understanding not only sets forth how the BITs should be amended, 
but, as described later in this testimony, it also secures in the 
context of future EU measures acknowledgments from the European 
Commission regarding continued consultations and the protection of 
existing investments, which could be of significant importance to the 
United States and to U.S. investors.
    The specific aspects of the U.S. BITs that raised issues of 
compatibility are:

   first, the non-discrimination provisions (national 
        treatment, most-favored-nation treatment, and the exception to 
        nondiscrimination obligations for benefits accorded investors 
        of other countries under obligations arising from a BIT party's 
        membership in a customs unions or free trade area);

   second, the disciplines on the use of performance 
        requirements; and

   third, the obligation not to restrict capital movements.

    By our willingness to make certain adjustments and political 
commitments in these areas, we can preserve the vital protections that 
these treaties otherwise provide for U.S. investors (for example, 
protections regarding expropriation, fair and equitable treatment and 
full protection and security, temporary entry of key personnel, and 
binding international arbitration). Moreover, we also obtained 
important assurances from the European Commission about the protection 
of U.S. investors in these countries in two key contexts: first, where 
U.S. investors seek to invest onward throughout the rest of Europe, and 
second, with regard to the Commission's readiness to consult with us 
when the Commission is considering proposals that might affect the 
rights of U.S. investors not only in these countries but throughout 
Europe.

                THE BITS' NON-DISCRIMINATION PROVISIONS

    U.S. BITs include a broad commitment to afford covered investments 
the better of national treatment and most-favored-nation (MFN) 
treatment. However, they permit the Parties to take exceptions to these 
obligations in specific sectors, and with respect to specific matters, 
provided the Parties identify them in an annex to the treaty. In these 
particular BITs, the United States took annex exceptions to national 
treatment, and in some cases to MFN, for such sectors as air transport; 
ocean and coastal shipping; energy and power production; radio, 
television and communications; satellite ownership; ownership of real 
property; provision of telephone and telegraph services; mining on the 
public domain; maritime and maritime-related services; and primary 
dealership in U.S. Government securities.
    In contrast, however, these acceding and candidates countries for 
EU membership typically listed few, if any, sectors or matters as 
excepted from national treatment or MFN treatment in their respective 
annexes. For example, the Czech and Slovak BITs only list ownership of 
real property and insurance as sectors where measures that do not 
conform with the national treatment obligation may be taken by these 
countries. They list no sectors as excepted from the MFN obligation.
    Our discussions with the European Commission, and the acceding and 
candidate countries, revealed a number of areas where EU requirements 
could conflict with the BITs' national treatment and/or MFN 
obligations. Thus, the amendments to these BITs identify additional 
sectors or matters with respect to which exceptions will be allowed for 
the new EU Member States. However, they are explicit in stating that 
exceptions are allowed only to the extent necessary to meet EU legal 
obligations. The sectors in which these new exceptions are allowed are, 
with regard to national treatment: agriculture, audio-visual, 
securities, insurance and other financial services, fisheries, 
hydrocarbons, subsidies, air transport, inland waterways transport, and 
maritime transport. New exceptions are also allowed with regard to MFN 
for agriculture, audio-visual and hydrocarbons.
    Another important aspect of the amendments is that they carve out 
from these new exceptions existing investments of U.S. firms for a 
period of either ten years from the date of the relevant measure, or 
twenty years after the entry into force of the BIT, whichever is later. 
In addition, the amendments provide that no exception applies to the 
extent that it would require, in whole or in part, divestment of an 
existing investment.
    In addition to concerns in these areas, the European Commission was 
concerned about measures that might create advantages for firms 
established in EU and non-EU countries as a result of liberalization 
within the EU or between the EU and other countries that might not be 
available to U.S.-owned investments. In particular, the Commission was 
concerned that the acceding and candidates countries--once they become 
Member States--may be obligated under EU law to accord preferential 
treatment to investors from other EU members or from non-EU countries 
that have a special relationship with the EU, but not to U.S.-owned 
enterprises. Moreover, the Commission thought additional uncertainty 
arose because Article 48 of the EC Treaty operates to entitle any firm, 
once established in accordance with the law of a Member State, to be 
treated in other EU members as a national of a Member State for 
purposes of the EU Treaty's guarantees on the right of establishment in 
any EU Member State.
    Thus, because of the Commission's concerns and its desire to avoid 
uncertainty in this area, we also agreed to address the BIT provision 
called the ``free trade area/customs union exception.'' This provision 
provides that the BITs' non-discrimination obligations do not apply to 
advantages accorded by a BIT party to third countries by virtue of that 
party's obligations deriving from membership in a free trade area or 
customs union. We thus included in the Protocols an acknowledgement 
that the exception applies to obligations that derive from an economic 
integration agreement that includes a free trade area or customs union, 
such as the European Union, and also that it applies to advantages 
accorded to nationals or companies of any third country by virtue of 
such obligations.
    By acknowledging this, we also created the opportunity to obtain 
from the European Commission, as part or our political understanding, a 
clarification of its understanding of the meaning of Article 48 of the 
EC Treaty: a clarification of the application of Article 48 to foreign-
owned companies that will be beneficial to any U.S. firm that meets its 
conditions and wishes to use an investment in one EU Member State as a 
platform for investment onward in other EU Member States. The 
Commission's clarification of this provision affirms that such firms 
will be free of restrictions on establishment elsewhere in the EU.

             THE BITS' PERFORMANCE REQUIREMENTS PROVISIONS

    The U.S. BITs with these countries contain a provision that 
prohibits the imposition of performance requirements upon an investor 
as a condition to establish, expand, or maintain an investment. 
Performance requirements typically take the form of requirements that 
goods be exported, or that goods or services be purchased locally, but 
similar requirements would also be prohibited. Because EU law includes 
certain requirements in the agriculture or audio-visual sectors that 
might be construed to be prohibited performance requirements, the 
amendments provide that the relevant provision of each BIT will not 
limit the ability of our BIT partners to impose performance 
requirements in these sectors, to the extent they are necessary to 
comply with EU law.

                     TREATMENT OF CAPITAL MOVEMENTS

    Each of the BITs with the acceding and candidate countries 
obligates the BIT parties to allow capital and other investment-related 
transfers to be made freely, and without delay, into and out of their 
respective territories. The EC Treaty, however, provides authority for 
the EU Council of Ministers to restrict capital movements either by 
adopting temporary safeguards in exceptional circumstances involving 
serious difficulties in the operation of the economic or monetary 
union, or by imposing financial sanctions as a result of a common 
position or joint action in relation to a common foreign or security 
policy. The European Commission was thus concerned that the obligations 
in the BITs would impinge on EU authorities in this regard and create 
complications should it ever become necessary to exercise this 
authority. Because the EU has never exercised this authority, we were 
unwilling to make any amendments to our BITs to address this concern. 
However, we acknowledged in the political understanding that the 
general exception addressing essential security interests in our BITs 
preserves the right of a party to apply measures that it considers 
necessary to protect its own essential security interests, and that 
good faith reliance on it would afford the BIT parties protection. We 
also acknowledged that essential security interests may include those 
deriving from membership in the EU.
    Finally, given the sensitivity of this issue for the European 
Commission, we expressed our willingness in the political understanding 
to continue consultations on this issue in the context of ongoing 
discussions between the Commission and Member States that have 
international agreements with other third countries that include 
provisions similar to those contained in these U.S. BITs.

                     FUTURE DEVELOPMENTS IN EU LAW

    Finally, the European Commission was concerned that, as the process 
of harmonization within the EU continues and extends to other sectors, 
EU measures might be enacted in the future that raise questions of 
compatibility with respect to obligations of our BITs. In response to 
this concern, we agreed on an amendment to the BITs that provides that 
the BIT parties agree to consult promptly whenever either party 
believes that steps are necessary to ensure compatibility between the 
BIT and the EC Treaty. In addition, in the context of the political 
understanding, the United States and the Commission expressed their 
willingness to consult through established means when new EU measures 
affecting foreign investment are under consideration and raise 
questions of compatibility with pre-existing international agreements 
between the United States and EU Member States.
    The understanding also acknowledges the importance of protecting 
existing investment in this context and expresses the intent that, 
whenever the accession of new Member States raises questions regarding 
the implementation or application of EU measures that would affect U.S. 
investments, or the imposition of new measures restricting foreign 
investment within the EU generally raises questions with respect to the 
impact on existing investments, consultations would be undertaken with 
the objective of protecting existing investment.
    To sum up, as a result of our willingness to address European 
Commission concerns by making these few but important amendments to our 
BITs, we have preserved the broader benefits these treaties afford U.S. 
investors. The amendments do not go beyond what, upon accession, will 
be legally required of our BIT partners under EU law. In addition, we 
have exempted existing U.S. investments from the application of new 
exceptions to national treatment and MFN under these BITs for at least 
ten years, and proscribed the application of any measure that would 
require divestiture in whole or part of a U.S. investment. We have 
secured Commission acknowledgment of the principle of protecting 
existing U.S. investments generally when new EU measures are under 
consideration, and established a basis for consultations when new EU 
measures are under consideration that may affect U.S. investors. And 
finally, we have obtained an important clarification from the European 
Commission on the EC Treaty's protection of the right of U.S. 
investors, once they are established in one EU Member State, to invest 
onward without hindrance in other members of the EU. When viewed in 
combination with the benefits U.S. investors will realize when these 
countries become members of the EU, and being mindful that the 
Commission initially sought termination of our BITs, the steps we have 
taken actually represent a significant gain for U.S. investors.

                               CONCLUSION

    Mr. Chairman, in closing, I end my testimony much as I opened it. 
The Protocols for the eight Bilateral Investment Treaties under 
consideration today and the Cape Town Convention support the 
Administration's policy to expand trade and investment globally. We 
believe that expanding markets overseas is good for America and 
American workers. The amendments to our BITs will support continued 
U.S. investment and growth in an expanding Europe. The Cape Town 
Convention will facilitate financing the sales of major American 
products to the four corners of the globe, particularly in developing 
countries, which are looking to the U.S. for leadership.
    We urge the Committee to take prompt and favorable action on the 
treaties before you today. Such action will help grow the American 
economy and produce new jobs, and strengthen economic relations with 
new and existing trading partners. I thank the Committee for its 
continuing interest in these matters and the Members and staff for 
devoting the time and attention to the review of these treaties. I 
would be happy to try and answer any questions the Members may have.

    The Chairman. Mr. Rosen.

    STATEMENT OF HON. JEFFREY ROSEN, GENERAL COUNSEL, U.S. 
                  DEPARTMENT OF TRANSPORTATION

    Mr. Rosen. I have provided a written statement and I thank 
you for accepting that in the record of today's hearing. In my 
oral remarks, I would like to highlight two aspects of the Cape 
Town Convention and the process that brought it to fruition. 
The first of these is the broad array of benefits that this 
Convention will produce, both here at home, and abroad.
    For countries such as the United States, which manufacture 
airframes, aircraft engines, and helicopters, there will be 
increased exports as the number of orders for this equipment 
increases. Increased exports will boost the economy and 
translate into more jobs. This job stimulus will be felt not 
just by the major manufactures, such as Boeing, GE, and United 
Technologies, but also by smaller companies that make the parts 
and provide services for these companies.
    In addition, the Convention and Aircraft Protocol will 
benefit the companies that provide the capital that finance the 
sale of such equipment around the world. U.S. financial 
institutions are of course major players in aircraft financing. 
The creditor protections provided for by the Convention and 
Protocol will benefit them by significantly reducing the risk 
they now incur when financing aircraft into countries whose 
laws do not meaningfully protect creditors in the event of 
default or insolvency.
    It is this risk reduction in turn which will bring 
significant benefits to many countries and airlines in the 
world. These benefits take the form of lower financing charges, 
and are fresh sources of capital for aircraft financing. And 
this is particularly of benefit to developing countries whose 
carriers have had to pay high interest rates, or who have not 
been able to access the commercial credit markets at all 
because of their risk.
    In addition, in terms of the benefits, the world's skies 
will become safer and cleaner as newer equipment is acquired 
and brought into service. Many countries' airlines are 
operating older, less sophisticated aircraft. The full 
implementation of this Convention and Protocol should hasten 
the replacement of this equipment with state-of-the-art 
aircraft.
    Now, the second item that I want to highlight is the 
extraordinary collaborative nature of this project since its 
inception. It is an example of what a government industry 
partnership can produce when done well. At each step of the 
negotiations, the State Department, the Transportation 
Department, the U.S. Export-Import Bank, along with U.S. 
commercial law financing experts, worked closely with 
representatives from industry, financiers, and aircraft 
registry interests.
    In addition, at all major stages of the process, the U.S. 
position on issues was coordinated through the interagency 
group on international aviation, whose membership in addition 
to those agencies I mentioned includes the Departments of 
Commerce and Defense, as well as airport, general aviation, and 
commercial aviation trade associations.
    Furthermore, the U.S. negotiators maintained an ongoing 
dialog with the state law commissioners, the Aircraft Title 
Lawyers Association, the Air Transport Association, and 
representatives of the American Bar Association section of 
business law. So it is easy to understand why the product of 
all this effort and coordination has produced a Convention and 
aircraft Protocol with so many benefits and with no apparent 
opposition to its ratification.
    In sum we believe the merits of the Convention and Protocol 
are compelling and the process that brought it about was a 
model collaboration between U.S. Government agencies, 
international organizations, private sector stake holders, and 
sovereign governments worldwide. Prompt ratification by the 
United States will enable us to begin to achieve its benefits.
    So I thank the committee for its interest and you 
personally, Mr. Chairman, for the attention that has been given 
to these matters and I would be pleased to answer any questions 
you may have.
    [The prepared statement of Mr. Rosen follows:]

                Prepared Statement of Hon. Jeffrey Rosen

  the 2001 cape town convention on international interests in mobile 
    equipment and protocol on matters specific to aircraft equipment
    Chairman Lugar and Members of the Committee:
    It is with great pleasure that I appear before you today, along 
with Shaun Donnelly, Acting Assistant Secretary of State for Economic 
and Business Affairs, to urge, on behalf of the Administration, that 
this Committee recommend that the Senate give its advice and consent to 
ratification of the Cape Town Convention and the Protocol on Matters 
Specific to Aircraft Equipment.

                      CAPE TOWN CONVENTION OF 2001

    The Cape Town Convention and Aircraft Protocol, when fully 
implemented, will bring great economic benefits to a variety of U.S. 
constituencies while helping to facilitate the modernization of airline 
fleets around the world. The benefits will be truly global. Developing 
countries and their airlines will be able to upgrade their fleets at 
reduced financing costs. The world's skies will be safer and cleaner as 
newer, state-of-the-art aircraft are acquired and brought into service. 
And for countries that manufacture aircraft there will be increased 
exports as the number of aircraft orders increases. Increased exports 
will also mean more jobs for exporter countries such as the United 
States.
    The Cape Town Convention and Aircraft Protocol were negotiated 
under the auspices of the International Institute for the Unification 
of Private Law (UNIDROIT), an intergovernmental organization focused on 
harmonizing the commercial law of nations, and the International Civil 
Aviation Organization (ICAO), the United Nations body responsible for 
international aviation. It was concluded in November 2001 at a 
Diplomatic Conference at Cape Town, South Africa, and has been signed 
by 28 states, including the United States. The Convention, 
coincidentally, enters into force today, April 1. We expect that the 
Aircraft Protocol will come into force late this year.
    The Convention is designed flexibly so to be able to operate in 
conjunction with protocols covering different types of high value 
mobile equipment. The Convention itself sets out the basic terms and 
provisions that underlie the regime. However, it is not equipment 
specific and in fact needs a protocol particular to a given type of 
equipment in order to operate. The Protocol before you today applies to 
airframes, aircraft engines and helicopters above a minimum size or 
power threshold. In addition to this Aircraft protocol, the Convention 
specifically contemplates that there will also be protocols governing 
railway rolling stock and space assets. Negotiations are at an advanced 
stage with respect to a protocol on railroad equipment and it is 
anticipated that a diplomatic conference will be held in 2005 to adopt 
such a protocol. Negotiations are at an earlier stage with respect to 
space assets. Left open is the possibility that additional protocols 
covering other types of high value mobile equipment, may be negotiated 
in the future.

                  FEATURES OF THE CAPE TOWN CONVENTION

    As a general matter, the Convention adopts the asset-based 
financing practices already widely used in the United States and weaves 
them into an international agreement. Specifically, the Convention 
establishes an ``international interest'', which is a secured credit or 
leasing interest with defined rights in a piece of equipment. These 
rights consist primarily of 1) the ability to repossess or sell or 
lease the equipment in case of default; and 2) the holding of a 
transparent finance priority in the equipment.
    Priority will be established when a creditor files, on a first-in-
time basis, a notice of its security interest, in a new high-technology 
international registry. Once an international interest has been filed 
by a creditor and becomes searchable at the international registry, 
that creditor's interest will have priority over all subsequent 
registered interests and all unregistered interests, with a few 
exceptions. The Federal Aviation Administration (FAA), which currently 
operates an aircraft registry, will serve as the authorized entry point 
into the International Registry. This will allow the aircraft financing 
practices in the United States, among the most efficient in the world, 
to continue undisturbed. The International Registry will be searchable 
on a 24 hour, 7 day a week basis. Fees will be charged for filing a 
security interest in the International Registry and for other services 
connected to use of the International Registry. Such fees are expected 
to be very small because of the electronic nature of the registry. Last 
fall, Secretary Mineta sent Congress a set of proposed technical 
amendments to the FAA's registration authority that are necessary for 
the FAA to implement its functions under the Convention and Protocol. 
That legislation is now pending before the House and Senate 
transportation authorizing committees.
    The rights and enforceable remedies created by the Convention and 
Aircraft Protocol are designed to reduce the risk assumed by creditors 
in financing transactions in many parts of the world. In many 
countries, the risk factor is significant because local laws either do 
not protect lenders in the event of default or bankruptcy, or are 
highly unpredictable. With respect to aircraft, this uncertainty is 
compounded by the fact that aircraft can and do move readily between 
countries. It is this uncertainty that drives up the cost of aircraft 
financing in many countries, which is reflected in the interest rate 
the financier charges the debtor.
    The Convention seeks to reduce this risk in a number of ways. For 
example, it provides financiers with a number of key rights with 
respect to an aircraft financed to an airline of a country that has 
ratified this Convention and Protocol. These include the right, upon 
default of a debtor, to deregister the aircraft and procure its export; 
to take possession or control of the aircraft, or sell or grant a lease 
in the aircraft; and to collect or receive income or profits arising 
from the management or use of the aircraft. The extent of these rights 
and the speed with which they can be exercised will be a function of 
the declarations a country files at the time it deposits its instrument 
of ratification. These declarations set out which remedies that state 
will allow and the means by which the remedies can be implemented. It 
can be expected that the greater the remedies a state chooses to 
recognize in its declarations, the greater will be its benefits.
    These benefits will take the form of lower financing charges and 
fresh sources of capital for aircraft financing. This will particularly 
benefit developing countries whose carriers have had to pay high 
interest rates or who have not been able to access the commercial 
credit markets at all because of their credit risk. For those countries 
that have historically financed aircraft acquisitions through the use 
of sovereign guarantees, the ability to make use of asset-based 
financing will allow such guarantees to instead be used for other 
national purposes.
    ICAO will supervise the International Registry. A Preparatory 
Commission, established by the diplomatic conference and comprising 20 
countries including the United States, has been doing the groundwork 
needed to get a registry system in place. In particular, working with 
ICAO, the Preparatory Commission prepared a request for proposals so to 
select an entity to administer the registry. The Request went out 
earlier this year and a selection by the Preparatory Commission will 
likely be made next month. It is expected that the International 
Registry will be operational in the latter part of 2004.

                               CONCLUSION

    In conclusion, I would like to underscore the importance of prompt 
ratification. Ratification by the United States will spur other 
countries to ratify, thus accelerating the entry into force of the 
agreements and hasten the realization of benefits to our economy, our 
exporters, the economic recovery of international aviation, the 
developing world, and the safety of aviation. I thank the Committee for 
its interest and attention to these matters and would be pleased to 
answer any questions you may have.

    The Chairman. I thank both of you for that testimony. I 
would just note, Mr. Donnelly, that in your testimony you point 
out that the Conventions are coming into force April 1, 2004, 
which you note coincidently is the date of this hearing. With 
only three ratifying states aboard, however, you point out that 
the Convention will not apply to aircraft until the Protocol 
also comes into force, so both are necessary.
    That requires ratification by eight states. Currently, four 
countries have ratified the Convention and the Protocol. We 
expect that the four additional ratifications are likely to 
occur by the fall, and that the Protocol is expected to come 
into force by the end of calendar year 2004.
    I compliment both of you and your staffs, as well as our 
staff of the Foreign Relations Committee on both sides of the 
aisle for alertness to the possibilities of leadership. One 
reason for taking this action, or having this hearing now in 
the midst of everything else that is going on in the world, is 
that, as you have mentioned, by acting in a timely way, we 
encourage other countries to do so.
    From the United States standpoint, we think that you and 
the administration have negotiated an excellent treaty that is 
a benefit to the aircraft industry and perhaps to others that 
you have noted. Yet all of that good work would come for naught 
if we fail to act. Our dragging our feet might make other 
countries drag their feet, or at least make them more reticent 
to step up to the plate. I thank you for the special efforts 
that have come about to prepare for this hearing, and for the 
body of work that you perform.
    If we were in any forum other than this body, that is the 
U.S. Senate, or the House of Representatives, we would be 
talking about jobs. We would be talking about how to employ 
more Americans in good paying jobs, and in sophisticated 
industries in which we are very competitive.
    Sometimes people ask, why in the Senate Foreign Relations 
Committee are you involved in such mundane matters as jobs, and 
American industry? Well, this is a major foreign policy issue. 
It's a major domestic issue. It's an issue for all Americans.
    What we're talking about today is expediting the 
possibilities that, as you pointed out, Mr. Rosen, the skies 
will be safer if there are new aircraft with state-of-the-art 
safety mechanisms and abilities to handle take-offs and 
landings at will. So that will be a safety factor for us and 
for the world.
    To get to that point someone must produce these aircraft 
and this equipment. We're very hopeful that it will be American 
workers in American plants. We believe, because we are state-
of-the-art and competitive, that there is a very good 
possibility that that will be the case.
    Having said all that, let me ask these technical questions 
of you for the benefit of filling out our record today. First 
of all, Mr. Donnelly, will revision of the Bilateral Investment 
Treaty, as you and I have both called the BITs, affect 
obligations under any other agreements to which the United 
States, or the eight countries we're considering today, or the 
EU, are a party?
    In other words, are there side effects, other effects that 
we should take into consideration in our action on these 
treaties?
    Mr. Donnelly. Thank you, Mr. Chairman. First let me just 
endorse all of the comments that you have just made about the 
importance of timing and U.S. leadership on this. We really 
think that as a major producer of aircraft and helicopters, the 
United States is going to be a major player in this, and it's 
very important that we be at the table from the very start. And 
we think that our being in a position to ratify early will help 
spur, as you said, Mr. Chairman, other countries joining it.
    On your specific question about, if I can call it corollary 
effects of this, we do not believe that there will be any. 
There has been similar issues raised by a few of the Eastern 
European countries regarding other agreements totally separate, 
outside of this area, more in the trade agreements area, and 
whether their accession to the EU requires some adaptation in 
those agreements. And there's a separate process underway 
within the administration involving the State Department, the 
U.S. Trade Representatives Office. But as far as any directly 
related effects that would flow from these amendments, we do 
not believe there are any, and it's been very carefully 
reviewed by the interagency experts, sir.
    The Chairman. Let me followup with a more specific question 
about the EU itself. Will these amendments to the BITs result 
in increased consultation requirements by the EU? If so, how 
would this benefit American industry doing business in the 
relevant countries? Has a formal consultation procedure been 
established at all at this point?
    Mr. Donnelly. Mr. Chairman, can I take that question and 
get an answer----
    The Chairman. Yes.
    Mr. Donnelly [continuing]. For you for the record. I don't 
want to speak in an ad hoc way and mislead the committee.
    The Chairman. It would be preferable to research the issue 
and come back to us.
    Mr. Donnelly. Yes, sir. We will get you a thorough answer 
to that question.
    [The following response was subsequently supplied.]

    As reflected in the understanding negotiated at the same time as 
the amendments, the United States and the European Commission made a 
political commitment to consult whenever new EU measures affecting 
foreign investment are under consideration and raise questions of 
compatibility between U.S. law and pre-existing international 
agreements between a Member State and the U.S. We further acknowledged 
that such consultation would take place through existing channels, for 
example, through informal contacts between the Commission and U.S. 
officials responsible for investment, diplomatic channels, and the 
U.S.-EU Senior Level Coordinating Group. The political understanding 
reached by the U.S. and the Commission also calls for a mutual good-
faith effort to take into account the views of countries with 
international agreements with the U.S.--they may be new candidates for 
accession or Member States--that may be affected by the contemplated 
measures.
    We believe these consultations should have a salutary effect on 
U.S. business interests in the region, because they provide a means by 
which to head off any problems before they materialize.
    Separately, in the Protocols amending the BITs that are before the 
committee, the United States and each of its BIT partners agree to 
consult promptly whenever either party to the BIT believes that steps 
are necessary to assure compatibility between the BITs and the EC 
Treaty. In such a case, traditional diplomatic channels would be 
utilized. Given that both the understanding and amendments contemplate 
only established channels for these new consultation commitments, we do 
not contemplate creating new ones to address related issues.

    The Chairman. In addition to affecting the ability of 
United States firms to do business in the BIT countries, will 
the amendments to the BIT benefit their ability to do business 
throughout the region?
    Mr. Donnelly. Yes, sir. That is one of the important 
benefits that we see in this package that we have been able to 
negotiate. We have gotten a clear understanding in writing from 
the European Commission that U.S. businesses established in one 
of these six acceding countries will have the full benefits. 
Whether they are previously established or to be established 
companies, that they will be able to take the full benefit of 
being able to operate from that base and be able to carry 
forward into the broader European market, which as you know, 
Mr. Chairman, is a large and rapidly expanding effort.
    That was a very important issue for our business community 
and one that we were able, we believe, to find a solution that 
represents a clear step forward for our companies.
    The Chairman. Has there been a framework developed, Mr. 
Donnelly, for modifying existing agreements that we have with 
countries that are poised to join the EU?
    Mr. Donnelly. Mr. Chairman, we believe the process we have 
gone through in this effort provides a framework. As you 
pointed out, six of the countries are acceding in the very 
short term, two others are on a somewhat slower path to accede 
in 2007. But the European Union has broader plans to continue 
expansion as countries qualify and step forward to express 
their interest.
    And we believe that the process that we've gone through, 
the model that we have developed here will provide a framework 
for us to use if this same issue should arise as other 
countries that we have Bilateral Investment Treaties with come 
forward in the accession process.
    The Chairman. Presumably, we'll be closely following EU 
accession efforts. These go on for quite awhile, and so would 
not be a surprise. On the other hand, during some other Foreign 
Relations Committee hearing at some stage, other countries may 
come on the horizon. I raise the question simply as a matter of 
precedent. Having proceeded in this way with these eight 
countries almost in routine fashion we wish to move ahead with 
others as they come in line.
    Mr. Donnelly. You know, we obviously will have to deal 
with--Mr. Chairman, the EU does have an ambitious expansion 
plan in mind. The time table will obviously be worked out 
between those countries and Europe. The United States has long 
been on record as supporting the process of European 
integration, we believe it is in our political interest, it's 
in our economic interest, and we want to support it.
    At the same time we want to make sure that our interests, 
particularly our economic interests are protected. So we will 
carry forward, I believe, a very similar process as the 
accession process moves forward, and I would think that you're 
quite correct that over the coming years you may see very 
similar packages coming back.
    Obviously, we'll have to study carefully each individual 
Bilateral Investment Treaty and each individual country 
situation to make sure that we are finding the right package 
that fits each particular situation, but we believe that the 
general model that we have been able to work out here will work 
in similar situations.
    Obviously, the European Commission will be a major player 
in that process, they have been the third party in this 
negotiation as we've negotiated with each of these eight 
acceding countries individually. We've also had the European 
Commission fully involved in that process, and they would be a 
major player as other accession candidates come forward. So I 
think we will be building on this model, sir.
    The Chairman. Without being too confusing, let me skip back 
to the Cape Town Convention Protocol for just a moment and 
highlight a paragraph in your testimony that I thought was 
helpful for the understanding of our members.
    You've pointed out that the treaty will facilitate the 
acquisition of newer, safer aircraft and help developing 
countries without private capital. The proposal that this new 
treaty will be in place in the near future has already been 
reflected in the United States Export-Import Bank preferential 
exposure fee terms for borrowers from countries that ratify and 
implement the Cape Town Convention and Protocol.
    Several major sales of U.S. equipment have been made or 
will be made based on the expectation of other countries. The 
United States will ratify the treaty.
    I point at the very practical basic dollars and cents issue 
frequently, even though the countries that we're talking about 
that might be interested in ratifying this and that may now 
come in because the United States is involved, may do so for 
these reasons. An entity such as our Export-Import Bank 
suddenly becomes available to them on very favorable terms to 
loan them money, if there happened to be capital shortages for 
these large investments in aircraft in the countries.
    I mention that because frequently these treaties sort of 
float by. It's thought well and good that we were all visiting 
with each other, but in this case there is a very, very 
practical side to this, and it involves American institutions 
and specifically EX-IM Bank, and perhaps others as the case may 
be. As we've already pointed out, it doesn't come into force, 
at least in the second instance, until eight countries are 
aboard. As the United States comes aboard, that might make 
number 4 and number 5, so the need for leadership here is once 
again evident.
    Let me ask, Mr. Rosen, these technical questions of you. 
The Convention and Protocol specifically indicate consistency 
with the United States bankruptcy law. They are not intended to 
affect a state's existing insolvency system. There is no 
reference to the provisions of U.S. law, which specifically 
deals with aircraft equipment and vessels. How, if at all, do 
the Convention and the Protocol interact with those provisions? 
What are the potential effects of this interaction?
    Mr. Rosen. Well, thank you, Mr. Chairman, for giving me the 
opportunity to address that, because one of the real positives 
of this Convention is that it's so consistent with the existing 
Uniform Commercial Code that we have in the United States, in 
our various States. And so as a practical matter there will not 
really be inconsistencies, they'll be one new aspect in terms 
of the registration, that they'll be a single port of 
registration through the FAA into the international registry, 
but in terms of the basic terms, this is part of why the United 
States has so few declarations that will be needed.
    The basic law is extremely similar to that that already 
exists under Article 9 of the Uniform Commercial Code, and so 
in some instances there's new terminology, let's say of 
international interest as opposed to security interest, but the 
concepts are fundamentally the same.
    And so in terms of U.S. law while this would augment and 
supplement it, it really will not be a significant change in 
terms of what we're already doing, but it will produce 
efficiencies through the consistency that will be available in 
an international context to have the kinds of rights and 
remedies, and the transparent priorities available for people 
to identify what interests exist. And the ability to have 
prompt relief in the event of insolvencies that those 
efficiencies, from having a clear law akin to what already 
exists in the United States, will enable benefits to take place 
in an international sale context.
    The Chairman. I appreciate your answer, which encompasses 
the Uniform Commercial Code. I also appreciate the fact that it 
has been adopted by all 50 of our States, and has fairly well 
developed case law background now. The coincidence of the 
treaties that we're discussing today with our own Uniform 
Commercial Code is especially important. I thank you for 
underlining that.
    Let me ask this question. The Convention and Protocol 
provide that the FAA will have heightened responsibilities, 
with respect to these additional international obligations. Is 
the FAA presently equipped to handle this new responsibility. 
If not, what is required to provide it with the ability to take 
on these new tasks?
    Mr. Rosen. Well, Mr. Chairman, let me say that while there 
are some new tasks for the FAA, I don't think that they are 
major or substantial burdens, in terms of what will be 
required. Primarily, the most important aspect is the operation 
of the entry from the United States standpoint, of the notice 
filings of the interest in the registry. And for that the FAA 
will need to participate and we have asked for--the 
administration has asked for some amendments to the--some 
technical amendments, really, to the FAA legislation or 
statutes, I should say, to enable that.
    But I think that the FAA is prepared, and the FAA has been 
a participant at every phase of the process and the 
negotiations leading up to this and is quite ready to take on 
the responsibilities that would be entailed by ratification of 
the Convention and Protocol.
    The Chairman. Let me ask now if there are any additional 
items that either of you would like to highlight for the 
benefit of the record. We have your testimony in full. You have 
summarized your comments. Hence, I have gone back, Mr. 
Donnelly, to some of your testimony, which I felt was 
especially pertinent in a practical way, in illustrating the 
relevance of the treaty.
    For the sake of the record, do either one of you, or both, 
have some final comment that you would like to make about these 
affairs?
    Mr. Donnelly. Mr. Chairman, thank you. I would like to just 
pick up on the point that you raised about the practical effect 
on the Export-Import Bank. The Export-Import Bank at a very 
senior level, one of their vice presidents, Robert Morin who is 
here with us today has been a full member of the negotiating 
team and they have been intimately involved every step of the 
way.
    So we think this is a case where, although this is a formal 
legal treaty, it is very much grounded in the practicalities of 
the business world and actual deals. And I believe the Export-
Import Bank is on record as having said they are reducing their 
exposure fee by 33 percent, from 3 percent to 2 percent for 
airlines that purchase equipment through the EX-IM Bank in 
countries that have signed on to this treaty.
    So I think it does have the effects that you were pointing 
out about really being able to provide an impetus of increased 
sales, newer aircraft, safer aircraft. This is really very much 
a treaty that can have very practical benefits for us and for 
all the countries of the world, and we appreciate the prompt 
efforts of the committee to look at it and try to help us move 
it forward. Thank you very much.
    The Chairman. Mr. Morin, would you identify yourself? Thank 
you for attending the hearing. Mr. Donnelly, are there others 
who are here today who have been especially important in the 
formation of this work that should be recognized?
    Mr. Donnelly. Well, I believe--and perhaps my colleague 
could do a better job, but we do have two senior FAA 
representatives who have been full members of the delegation, 
Jeff Klang and I believe Joe Standell, one from headquarters 
and one from the Oklahoma City office which is the center of 
this aviation effort, and they have been key members.
    We also have Jeffrey Wool and representatives of the 
aircraft group--aviation group in the private sector and 
members of some of the leading companies I see in the crowd as 
well here today. So I think we are--it's a very clear 
indication of the broad support and the collaboration that has 
been behind this effort and part of that has obviously been the 
consultation process with members of your staff, Mr. Chairman.
    The Chairman. Well, we appreciate the attendance of each of 
these public and private officials today. Putting heavier 
credentials to work is what we are about.
    Mr. Rosen.
    Mr. Rosen. Thank you, Mr. Chairman. I think the one 
additional thing that I would like to underscore is what a win, 
win proposition this particular Convention and Protocol are, 
because it has the benefits of--by virtue of being an 
efficiency enhancement of providing benefits simultaneously to 
the sellers and the workers of the companies who are making and 
selling the products and to the borrowers who are the 
purchasers of the equipment at issue.
    And so it's truly one of these win, win situations, and I 
think it's in part for that reason that another important 
aspect of the Convention, that the aircraft Protocol is set up 
to be the first of what would be several available Protocols. 
So the Convention is an equipment Convention that can 
accommodate future Protocols, and in that regard there are 
already processes underway for potential Protocols in the 
future that might deal with railway rolling stock and drill 
equipment, possibility space equipment, and perhaps in the 
future high value mobile agricultural or construction 
equipment.
    And so the structure of this particular Convention is one 
that, because it is a win, win kind of set up, an efficiency 
enhancing setup is one that I think is of great interest in a 
number of contexts. But this is a terrific place to begin and 
to demonstrate the benefits, and as you underscored the 
practical benefits that are already being realized through the 
reduction of exposure fees and credit costs.
    And so I welcome you and your committee's readiness to take 
this up so promptly and with so much attention, and hope that 
what I've been able to provide here today provides some help to 
that.
    The Chairman. Let me just say that the comment that you 
have made is especially interesting. You had mentioned some 
very important industries that might use the same framework, 
with, I suppose, slight modifications of language pertinent to 
those industries. Where in the grist of the mill process are 
these agreements? Are they well along? How could you describe 
administration efforts?
    Mr. Rosen. Well, I think it's fair to say that they're at 
different stages, that some of them are more inchoate than 
others, that the ones with regard to the rail stock and rail 
equipment is perhaps underway, but that these are, I think the 
subject of continuing negotiation processes and are something 
that will continue.
    But in part, the success of the aircraft Protocol if 
countries are able to move ahead and ratify it and take 
advantage of it's benefits will prove a model of how these 
things might be done.
    The Chairman. I appreciate that. I'm sure that all 
Americans who are listening to this record will appreciate 
this, because each of these industries, for the same reasons 
we're discussing the aircraft industry, have vital employment 
opportunities. They offer new jobs for Americans, and new 
possibilities, utilizing our basic institutions.
    We wish you and your colleagues well as you all help these 
procedures move ahead. Let me mention that we'll keep the 
record of the hearing open for the rest of the day in the event 
that members who were not able to attend the hearing have 
questions that they may wish to submit. We hope that you would 
respond quickly to such questions, as well as to the one 
question that you reserved, Mr. Donnelly, earlier on, so that 
our record will be complete.
    I want to consult closely with Ranking Member Senator Biden 
to put this on the agenda of our next mark up. It is 
problematic simply because of the schedule of the Senate. We 
want to make certain that we are all here, and that we have 
some reasonable chance of getting a quorum.
    It is a high priority for our committee's activity. We 
would hope to get the treaty to the Senate floor so that our 
colleagues, all of them, could consider its merits. We thank 
both of you for coming, as well as your staffs, and those who 
have supported you. Likewise, we thank staff on both sides of 
the aisle here who have made this hearing very successful. 
Having said that, the hearing is adjourned.
    Mr. Donnelly. Thank you, sir.
    Mr. Rosen. Thank you, sir.
    [Whereupon, at 10:23 a.m., the committee adjourned, to 
reconvene subject to the call of the Chair.]
                              ----------                              


             Additional Questions Submitted for the Record


   Response of Hon. Shaun Donnelly to an Additional Question for the 
              Record Submitted by Senator Richard G. Lugar

    Question. The testimony describes a process for consultations to 
take place between the U.S. and the European Commission to address 
certain issues that may arise in the future. Would such consultations 
be in addition to the procedures that already exist or would new 
channels need to be created for such consultations to take place?
    What, if any, effect would such consultations have on U.S. business 
interests in the region?

    Answer. As reflected in the understanding negotiated at the same 
time as the amendments, the United States and the European Commission 
made a political commitment to consult whenever new EU measures 
affecting foreign investment are under consideration and raise 
questions of compatibility between U.S. law and pre-existing 
international agreements between a Member State and the U.S. We further 
acknowledged that such consultation would take place through existing 
channels, for example, through informal contacts between the Commission 
and U.S. officials responsible for investment, diplomatic channels, and 
the U.S.-EU Senior Level Coordinating Group. The political 
understanding reached by the U.S. and the Commission also calls for a 
mutual good-faith effort to take into account the views of countries 
with international agreements with the U.S.--they may be new candidates 
for accession or Member States--that may be affected by the 
contemplated measures.
    We believe these consultations should have a salutary effect on 
U.S. business interests in the region, because they provide a means by 
which to head off any problems before they materialize.
    Separately, in the Protocols amending the BITs that are before the 
Committee, the United States and each of its BIT partners agree to 
consult promptly whenever either party to the BIT believes that steps 
are necessary to assure compatibility between the BITs and the EC 
Treaty. In such a case, traditional diplomatic channels would be 
utilized. Given that both the understanding and amendments contemplate 
only established channels for these new consultation commitments, we do 
not contemplate creating new ones to address related issues.

                                 ______
                                 

Responses of Hon. Shaun Donnelly to Additional Questions for the Record 
               Submitted by Senator Joseph R. Biden, Jr.

    Question 1. Are there any related exchange of notes, official 
communications, or statements of the U.S. negotiating delegation not 
submitted to the Senate with regard to the Convention and the Protocol, 
which would provide additional clarification of the meaning of the 
terms of the Convention and the Protocol? If so, please provide them.

    Answer. There were no exchange of notes or official communications 
with regard to the meaning of the terms of the Convention and the 
Protocol. With regard to statements of the U.S. negotiating delegation, 
an official record of the deliberations of the Diplomatic Conference 
has not been issued, although we have requested an unofficial copy from 
the Secretariat and we will provide that to the committee when 
received. We believe that the record of the meetings will not 
contribute to the meaning of terms, beyond what has already been set 
forth in the Official Commentary.

    Question 2. What is the view of the executive branch with regard to 
the authoritative nature of the Official Commentary issued by UNIDROIT?

    Answer. The Official Commentary of the Convention and the Protocol, 
issued by UNIDROIT in September 2002, is an interpretive aid. The 
Commentary was authorized to be issued by a formal Resolution of the 
Diplomatic Conference. It was produced by the appointed Rapporteur, 
together with the chairs of each committee of the Conference and in 
close collaboration with key participating States. The United States 
delegation and U.S. industry representatives reviewed every provision 
of the Commentary, and are satisfied with its accuracy.

    Question 3. Does the executive branch regard the Convention and the 
Protocol as self-executing? Are there any provisions of either which 
are not self-executing? Please be specific.

    Answer. The financing and other basic provisions of the Convention 
and Protocol on secured interests, transactional remedies, etc., do not 
require any implementing legislation, state or federal, and to that 
extent are self-executing. The basic concepts of the Convention and 
Protocol were drawn from the uniform state law in the United States 
(Uniform Commercial Code, Article 9 on secured finance) and the 
transaction results are consistent with that law, so that there is no 
need for further legislation to have its provisions implemented by 
financing parties.
    The exception to the above relates only to the Federal Aviation 
Administration's (FAA) role in the new finance-registry system. All key 
participants, government and industry, in the United States have agreed 
that, both for overall effectiveness of aircraft finance and 
maintaining the effectiveness of the FAA's current role in 
registrations for aircraft interests, the FAA should be the single 
point of entry for authorization for filings under the Convention for 
U.S. registered aircraft, which would occur at the FAA's main registry 
facility in Oklahoma City. In order for that to operate properly, 
technical amendments to the FAA's current authority have been submitted 
to Congress by the Department of Transportation.
    The technical amendments essentially do three things: first, they 
update the FAA's statutes by adding references to the new Convention 
registry and provide that the FAA will be designated as the ``entry 
point'' for registration of U.S. aircraft and engines for filings under 
the new system. Secondly, they provide that deregistration and filing 
authorization follow the Convention's requirements as to consent of 
affected parties. Thirdly, they provide for filings of prospective 
interests, a modem approach followed by the Uniform Commercial Code and 
standard in such financings, but not included in FAA standards set in 
the 1950s. There is no known opposition to these amendments, they track 
modem aircraft finance, and they have been supported by all key 
participants in the air-finance sector.
    The effect of the foregoing is that transacting parties may bring 
actions based on the provisions of the Convention and the aircraft 
finance Protocol in the courts of a State party to the Convention. As a 
general matter, the Convention establishes certain financing interests 
in covered transactions, and transacting parties can seek enforcement 
thereof without requiring prior approval or action of governmental 
authorities with regard to claims brought under the Convention or 
Protocol. The Convention and Protocol do not however supercede 
otherwise applicable law, except to the extent a matter is resolved by 
those treaty texts. Thus transacting parties in the U.S. could also 
cite grounds for action under the Uniform Commercial Code or other 
applicable law, but would not need to do so; in the case of conflict, 
the provisions of the Convention would prevail.

    Question 4. Your testimony describes extensive consultation with 
other federal agencies and interested parties in the private sector. 
During the course of the negotiations, were there any consultations 
with this committee? If not, why not?

    Answer. During the course of negotiations, the State Department did 
not brief the Senate Foreign Relations Committee (the SFRC), but rather 
relied upon aviation industry representatives who had contact with 
members of the SFRC from time to time. In briefings done by industry 
representatives, materials that were provided to staff, had been 
discussed with and approved by the federal agencies working on the 
Convention and the Protocol.
    I understand this question as reflecting a desire by the SFRC to be 
kept better informed by the State Department during the course of 
negotiations. My colleagues and I take note of that desire and will 
certainly endeavor to be more proactive in the future.

    Question 5. Article 5(3) of the Convention states that 
``[r]eferences to the applicable law are to the domestic rules of the 
law applicable by virtue of the rules of private international law of 
the forum State.'' The term ``applicable law'' is not defined in 
Article 1. Does the meaning of ``applicable law'' as set forth in 
Article 5(3) apply to the same term when used elsewhere in the 
Convention (e.g., the term ``applicable law'' is found in several other 
articles, such as Articles 12, 30(2) and 50(3))?

    Answer. The definition provided in Article 5(3) is the commonly 
applied definition of that term in private international law 
conventions, such as the United Nations Convention on Contracts for the 
International Sale of Goods (Article 7) and the United Nations 
Convention on the Recognition and Enforcement of Foreign Arbitral 
Awards (Article 5). The common definition of ``applicable law'' set 
forth in article 5(3) is intended to applywhenever the term is used in 
the Convention.

    Question 6. In the proposed declaration for Convention Article 
39(1)(b), does the term ``any entity thereof'' include states and 
municipalities?

    Answer. Yes, the term ``any entity thereof'' is intended to include 
states, municipalities and other political subdivisions.

    Question 7. What is the purpose of Convention Article 40, in 
contrast to Article 39(1)(a)? That is, Article 39 does not require a 
non-consensual right to be registered, and Article 40 does. Why is this 
distinction made in the Convention?

    Answer. Article 39 applies to certain non-consensual rights or 
liens, which by domestic law in a particular jurisdiction may have 
priority without registration. Article 40 permits a State to require 
that those non-consensual rights, as well as other non-consensual 
rights that may not have priority by virtue of their domestic law, will 
nevertheless acquire such priority pursuant to the Convention upon 
registration on a first to file basis. For developing countries that 
wish to enhance their credit capacity under this Convention system it 
will be important to maximize the application of Article 40 with 
respect to such rights or liens, rather than rely on Article 39, since 
the requirement to register such liens in order to obtain priority will 
have a significant effect on ensuring predictability for creditors. By 
way of contrast, since the United States already has a well functioning 
aircraft-finance market, declarations recommended for the United States 
in the Secretary of State's Report transmitted to the Senate by the 
President, Senate Treaty Doc. 108-10, cover only Article 39, and would 
therefore preserve intact existing practices in the United States.

    Question 8. Article XIII of the Protocol provides a procedure for a 
debtor to issue an irrevocable deregistration and export request 
authorization. The Secretary of State's letter, and the Official 
Commentary, indicate that this process is subject to related aviation 
safety laws and regulations. Is the export of aircraft in this manner 
also subject to any applicable export control laws and regulations in 
the United States? Please elaborate.

    Answer. Absent express provisions to the contrary, neither the 
Capetown Convention nor the Protocol would have any affect on export 
control laws or regulations. The only regulatory matter affected by an 
express provision in the Protocol relates to aviation safety 
procedures. Thus, the Convention and the Protocol will have no effect 
on export and national security law or regulations and will provide no 
limitation on the exercise of those constraints by the relevant 
governmental agencies.
 additional protocols with eu acceding countries or candidate countries
    Question 1A. Each protocol contains an exchange of letters 
regarding the ``essential security interests'' clause in each of the 
underlying treaties.
    Was the discussion with the European Commission and with the 
Acceding Countries and the Candidate Countries about the possible 
applicability of the ``essential security interests'' clause limited to 
the issue of possible restrictions on capital movements?

    Answer. The issue of ``essential security interests'' arose in 
discussions with the European Commission and the Acceding and Candidate 
Countries only in the context of the existing EU authority under the EC 
treaty to impose restrictions on capital movements in limited 
circumstances and actions that Acceding and Candidate Countries might 
need to take to comply. However, the provision in our BITs is not 
limited to this context.

    Question 1B. Do you envision that the countries might be compelled 
by their EU obligations to invoke the ``essential security interests'' 
clause in other contexts?

    Answer. Although we are not aware of circumstances where the 
``essential security interests'' clause has been invoked by a Party to 
a U.S. BIT to defend actions otherwise inconsistent with BIT 
obligations, the possibility that it might be invoked in the future in 
relation to EU obligations in contexts other than capital movements can 
not be excluded entirely. It is difficult to envision under what 
circumstances this might occur. Measures permitted by the provision on 
the protection of a Party's essential security interests would include 
security-related actions taken in time of war or national emergency. 
Actions not arising from a state of war or national emergency must have 
a clear and direct relationship to the essential security interest of 
the Party involved. We view measures to protect a Party's essential 
security interests as self-judging in nature, although each Party would 
expect the provisions to be applied by the other in good faith.

    Question 1C. Was it understood that the ``essential security 
interests'' clause should only be invoked in extraordinary 
circumstances?

    Answer. Yes. During our discussions with the European Commission 
and Acceding and Candidate Countries, we discussed the meaning and 
purpose of this clause.

    Question 1D. Has the ``essential security interests'' clause been 
invoked under the current BITs with any of the Acceding Countries or 
Candidate Countries?

    Answer. Although the United States has never been a party to an 
investor-State dispute under any of our Bilateral Investment Treaties, 
U.S. investors have invoked the dispute settlement provisions of our 
BITs against several of our treaty partners, including some of the 
Acceding and Candidate Countries. We are not aware, however, of any 
instance in which the ``essential security interests'' clause has been 
invoked in any of those cases.

    Question 2. If the United States does not ratify these protocols, 
is it the view of the Department that the Acceding Countries and 
Candidate Countries would likely decide to terminate the Bilateral 
Investment Treaties?

    Answer. Yes. Although we cannot be certain of the actions that 
individual countries would take, our assessment is that, if it became 
evident that the U.S. did not intend to ratify these protocols, the 
European Commission would renew its efforts to encourage these 
countries to terminate their BITs with the U.S. by, among other things, 
threatening infringement proceedings. We believe that given the 
Acceding Countries' commitments in their Acts of Accession to address 
incompatibilities or withdraw from their international agreements with 
third countries, the Accession Countries would be likely to provide 
notice of termination of their BITs with the U.S. Candidate Countries 
would also be likely to do so, although the more distant date of their 
actual accession might affect the timing of their decision.
                               __________

                  STATEMENTS SUBMITTED FOR THE RECORD

                                    Aviation Working Group,
                                                    March 29, 2004.

Senator Richard G. Lugar, Chairman,
Senator Joseph R. Biden, Ranking Member,
Committee on Foreign Relations,
U.S. Senate.

Re:  Cape Town Convention and the Aircraft Protocol

    Dear Senators Lugar and Biden,

    I write to you as Secretary of the Aviation Working Group (AWG), a 
non-profit entity whose members are the major aerospace manufacturers 
and financial institutions set forth in annex 1 hereto.
    I write to underscore the firm support of the AWG and its members 
for the Cape Town Convention and the Aircraft Protocol, and to express 
appreciation for the Committee's decision to take action on these 
instruments this term. We have also been authorized to pass to the 
Committee a letter of support from the Air Transport Association, and 
attach that letter as annex 2 hereto.
    AWG has actively participated in the development and negotiation of 
the Cape Town instruments for a number of years, working in close 
coordination with the U.S. government negotiating team among others.
    We believe that prompt and widespread ratification of the Cape Town 
instruments will significantly promote a wide range of aerospace 
interests, starting with increased aerospace exports and job creation. 
We also believe the texts will advance broader governmental interests, 
including adoption of commercially-oriented rules of law in cross-
border trade.
    Please do not hesitate to call on us to provide any assistance as 
advice and consent to ratification is considered over the coming 
period.

            Sincerely yours,
                                              Jeffrey Wool,
                                                         Secretary.

    [Attachments.]

                                ANNEX 1

                       Aviation Working Group/AWG

                      awg structure and membership
AWG is a not-for-profit legal entity whose members are:
Airbus S.A.S.
The Boeing Company
Bombardier Inc.
Boullioun Aviation Services, Inc.
Citibank, N.A.
debis Airfinance
DVB Bank Aktiengesellschaft.
E M B R A E R--Empresa Brasileira de Aeronautica S.A.
GE Capital Aviation Services Inc.
General Electric Company
Indosuez Air Finance S.A.
International Lease Finance Corporation
JPMorgan Securities Inc.
 KfW
Morgan Stanley & Co. Incorporated
Rolls-Royce PLC
Singapore Aircraft Leasing Enterprise Pte. Ltd.
SNECMA S.A.
United Technologies Corporation (Pratt & Whitney Division)

                                ANNEX 2

                         Air Transport Association,
                        1301 Pennsylvania Ave., Suite 1100,
                                     Washington, DC, June 13, 2004.

Mr. Jeffrey Wool, Secretary
Aviation Working Group
c/o Perkins Coie
607 14th Street, 8th Fl.
Washmgton. DC, 20005

Re:  Cape Town Convention and its Aircraft Protocol

    Dear Jeffrey,

    As you know, ATA has followed the development of the Cape Town 
Convention and its Aircraft Protocol (the ``Convention'') inc1uding the 
recent U.S. signature thereof and efforts now underway to seek prompt 
ratification of these instruments.
    We are also aware of the active role played by the Aviation Working 
Group within the framework of a broad U.S. effort to develop and 
promote these instruments.
    While we have not felt it necessary to play an active role 
regarding the Convention, ATA does support its ratification. That 
support stems, in part, from the fact that the U.S., through its 
permitted declarations to the treaty, will ensure the continuation of 
current recordation procedures and priorities via use of the Federal 
Aviation Administration as the interface with the new international 
registry created under the Cape Town Convention.
    Please feel at liberty to pass this letter to others involved in 
the ratification process. I would be happy to respond to any questions 
regarding this matter.

            Sincerely,
                                            James L. Casey,
                                President & Deputy General Counsel.

                                 ______
                                 

                          General Electric Company,
                                           One Neumann Way,
                                    Cincinnati, OH, March 29, 2004.

Honorable Richard G. Lugar, Chairman,
U.S. Senate Committee on Foreign Relations,
Dirksen Senate Office Building,
Washington, DC.

Honorable Joseph R. Biden, Ranking Member,
U.S. Senate Committee on Foreign Relations,
Dirksen Senate Office Building,
Washington, DC.

Re:  Cape Town Convention and its Aircraft Protocol

    Dear Senators Lugar and Biden,

    I write to you to underscore our firm support for the Cape Town 
Convention and its Aircraft Protocol, and to express General Electric's 
sincere appreciation for the Committee's decision to take action on 
these instruments this term.
    GE's Aircraft Engines component has actively supported the 
development of Cape Town for a number of years, working in close 
coordination with the U.S. government negotiating team.
    The ability to protect the interests of U.S.-based manufacturers in 
cross-border transactions is vitally important to us. We believe that 
prompt ratification of the Cape Town Convention will help to promote a 
wide range of U.S. interests and should provide a much needed boost for 
aerospace exports and job creation. We also believe the Convention will 
advance broader U.S. interests, including adoption of commercially 
oriented rules of law in cross-border trade.
    Please do not hesitate to call on us to provide any assistance as 
advise and consent to ratification is considered over the coming 
period.

            Sincerely,
                                  David L. Calhoun,
                     President and Chief Executive Officer,
                                               GE Aircraft Engines.

                                 ______
                                 

                                   Pratt & Whitney,
                                           400 Main Street,
                                 East Hartford, CT, March 30, 2004.

The Honorable Richard G. Lugar,
Chairman, Committee on Foreign Relations,
United States Senate,
Washington, DC.

    Dear Mr. Chairman:

    I write to reiterate the strong support of Pratt & Whitney and 
United Technologies Corporation for the Cape Town Convention and its 
Aircraft Protocol. Prompt ratification of Cape Town is crucial and we 
appreciate the Committee's decision to take action early this year.
    We have actively worked to support the development, negotiation and 
now ratification of the Cape Town Convention for a number of years. 
This convention will significantly promote a wide range of U.S. 
interests, including the health of the aerospace industry and the 
creation ofjobs. Moreover, Cape Town will promote the adoption of 
commercially oriented rules of law in cross-border trade, which 
benefits us all.
    We hope that the Senate Foreign Relations Committee will continue 
to move expeditiously with its consideration of the Cape Town 
Convention. Prompt ratification by the United States will certainly 
serve as incentive for other countries to ratify, opening up additional 
markets for U.S. exports.
    Please do not hesitate to call on us to provide any assistance that 
may be required as the Senate moves forward with advice and consent of 
the Cape Town Convention over the coming months.

            Sincerely,
                                        Louis R. Chenevert,
                                                         President.