Warning taxpayers and parliamentarians of the Americas: if you adopt the Central American Free Trade Agreement (CAFTA), downturns in your economy may entitle foreign corporations to billions of dollars in damage claims under the terms of CAFTA’s foreign “investor protection” rules.

Hard to believe? It has already happened. After Argentina’s 2001 devastating financial crisis, an astonishing 27 cases were filed by foreign utility companies against Argentina in a special arbitration body of the World Bank. These foreign firms appear to be claiming that Argentina’s peso devaluation and the emergency measures the government took to weather the crisis constituted an indirect “expropriation” or nationalization of its profits in violation of the special foreign investor privileges included in various Bilateral Investment Treaties (BITs). The 27 known cases likely amount to billions of dollars in claims and there may be dozens of other cases pending of which we are not aware in other venues .

This story is cause for worry as it involves an all-too-common scenario in Latin America. In the early 1990s, Argentina was pressured by the IMF and the World Bank to implement broad privatization, deregulation and free trade polices along with finance and investment liberalization. Many public utilities were sold or entered into multi-year concession contracts with foreign firms (some of them owned by governments themselves) under extraordinarily favorable terms, including guaranteed dollar-denominated rates. Rate increases were pegged to the U.S. inflation rate, even though such indexing was contrary to Argentine law. As a consequence, even though Argentina was in a deflationary period in the late 1990’s, some of these foreign firms continued to raise their rates as U.S. inflation rates increased. Billions of dollars worth of hard-earned Argentine pesos that used to go the national treasury now flowed into the back pockets of foreign firms, their owners and shareholders.

In late 2001, Argentina’s economy collapsed. Banks and businesses closed. Unemployment skyrocketed. Unrest spread and tragically, dozens of people were killed as the nation saw five presidents come and go in two weeks. It was the worst financial crisis in Argentina’s history, with devastating impacts on the poor and middle class, and with national security implications as well. In January of 2002, the government was forced to end the pesos’ peg to the dollar and devalue the peso by 30%. The government also passed an economic emergency law that, among other things, froze utility rates. After a long period of rising rates, a rate freeze in the time of massive unemployment and unrest seemed a prudent policy to assist Argentines who were bearing the brunt of the economy’s collapse.

Much ink has been spilled analyzing the causes of the crisis and the controversial role of the international financial institutions. But little has been said about these 27 extraordinary suits by foreign firms. That is because the World Bank’s arbitration body generally operates behind closed doors. Local governments and the public have no right to participate or have their voices heard. Decisions are made by three trade tribunalists under a set of rules that are very favorable to the foreign investor.

After raking in the profits in the good years, the firms were asked to tighten their belt along with the rest of the country in the lean years. The firms were not seized, nationalized or expropriated, rather they made less money than they would have if there had been no economic crisis. In response to the legitimate efforts to contain an economy that was spinning out of control, the firms have sued Argentina and its taxpayers for billions arguing that these government actions constitute a seizure of their anticipated profit!

Costa Ricans need to be aware that CAFTA contains the same controversial investor rights found in the BITs, and disputes under CAFTA would be heard in the same World Bank trade tribunals.

The outrageous claims against Argentina are the latest twist in the controversial saga of the expansive investor protections granted to corporations under NAFTA, CAFTA and an increasing number of BITs. Like a sport in which all the games are fixed, these “investor protections” contained in trade and investment agreements set the conditions for foreign firms to make a profit even in the extremes of a financial crisis. The Argentine example provides yet another reason the CAFTA – and its expansive foreign investor protections – pose a grave threat to the sovereignty and economic health of people throughout the Americas.

Lori Wallach is the director of Public Citizen’s Global Trade Watch and author of Whose Trade Organization: A Comprehensive Guide to the WTO (2004, The New Press).

###