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Pt. 3 in the section on expropriation is highly problematic, in that it effectively commits signatory states to uncontrolled hard-currency liabilities. The obligation to compensate expropriated properties of foreign residents in foreign currency is (a) discriminatory against own residents (who are generally required to accept the coin of the realm in settlement - this being the entire point of having a coin of the realm), and (b) severely destabilizing of the foreign exchange in the event that compelling public interest requires expropriation of more property than can be covered by the strategic foreign currency reserve.

For smaller countries, who all else being equal will have higher foreign investment relative to the size of their economy, maintaining an adequate strategic currency reserve to buy out all foreign direct investment would impose a non-trivial real cost, which the country in question would have no legal means to recover from the principal beneficiaries (the foreign residents owning the properties in question).

Further, it is unclear what public purpose is served by shielding foreign investors from currency risk in the event of expropriation. In the ordinary course of business, people who invest in currencies outside their own must themselves bear the risk that said currencies depreciate or are deliberately devalued. Carving out an exemption (at public expense) from the ordinary currency risk assumed by any firm or individual doing business in a currency not his own seems like it should require some non-trivial amount of justification.

The definition of indirect expropriation in the Annex to same chapter is potentially problematic, in that an expansive reading of this definition could be said to cover any sufficiently large tax increase on a particular sector, or even sovereign default on treasury bonds outstanding. It behooves the treaty to dispel such concerns by stating explicitly that it is not a "reasonable expectation" for an investor that he be exempt from such changes in tax structure as may happen to happen from time to time, nor can there ever be a "reasonable expectation" (as applied in this article) that sovereigns will not default.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jul 2nd, 2014 at 10:46:04 AM EST

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