Last year, the U.S. Chamber of Commerce joined several leading U.S. trade associations, free trade supporters all, in an extraordinary step: urging the U.S. Congress to think twice before renewing U.S. trade preferences for Ecuador. The reason? A continuing pattern of disregard for the rights of foreign investors.

Over a period of many years, investors in Ecuador have been embroiled in a series of investment disputes. As of 2008, according to the UNCTAD World Investment Report, Ecuador had 14 investment treaty arbitration claims lodged against it (then fourth highest globally), including four new claims in 2008 alone.  More have since been filed and a recent report by the Latin Business Chronicle noted that Ecuador now has the second highest number of claims against it of any country in the world.

Ecuador’s response to these disputes has been to withdraw from the ICSID Convention and move to terminate Bilateral Investment Treaties with 13 countries, including the United States. Recently, Ecuador asked a U.S. court to deny one investor the right to arbitration under the existing BIT, a request the judge has now dismissed.

The State Department’s 2010 Investment Climate Statement – Ecuador (Chapter 6 of the Ecuador Country Commercial Guide) spells out the dangers facing foreign investors:

“The legal complexity resulting from the inconsistent application and interpretation of its existing investment laws complicates enforcement of contracts and increases the risks and costs of doing business in Ecuador. Government officials and private Ecuadorian businesses have used regulatory schemes and questionable legal maneuvers to affect foreign company operations in the country. Companies have sometimes been confronted with requirements of additional payments not negotiated in original agreements; receiving full and timely payments due can be another recurring problem. Business disputes with U.S. companies can become politicized, especially in sensitive areas such as the energy sector.” (Emphasis added).

The report also provides some insight into the ideology behind Ecuador’s heavy-handed approach to investors:

“[T]he Government of Ecuador has modified the country’s investment regime in response to key provisions included in Ecuador’s October 2008 Constitution. For instance, Article 339 of the Constitution provides that ‘the State will promote national and foreign investment … prioritizing national investment.’ Also, ‘foreign direct investment will be complementary to national investment … and be targeted in accordance to the needs and priorities defined in the National Development Plan.’ Article 422 of the Constitution states that ‘Ecuador will not enter into international agreements or instruments under which the Ecuadorian State would have to cede sovereign jurisdiction to international arbitral tribunals in contractual or commercial matters between the State and individuals or corporations.’”

In other words, investment is welcome in Ecuador on the government’s terms, and without the protections that investors have previously been due under international agreements. Consequently, legal certainty is far and away the biggest question mark for any company considering capital investment in Ecuador.  At the U.S. Chamber our goal is more rule of law - not less. And across the region, we're seeing that the absence of rule of law has a chilling effect on inward investment.  It's not limited to Ecuador, but Ecuador has clearly been a case study with some of the lowest annual foreign direct investment inflows in the region.

Notwithstanding these serious concerns, last week in a Miami Herald opinion piece, the government declared unequivocally, “Ecuador is open for business.” Really? Webster’s defines “investment” as, “the outlay of money, usually for income or profit.” Ecuador may welcome the outlay… but investors shouldn’t count on retaining the right to a profit.

However, if the government in Ecuador is seriously interested in investment, it holds its fate in its own hands.  In 2003, the United States announced it would negotiate free trade agreements with Ecuador and its Andean neighbors. Today, Peru’s agreement is in place and Colombia’s awaits Congressional consideration.

Meanwhile, Ecuador and neighboring Bolivia have gone the opposite route. Instead of signing FTAs, Ecuador has renounced BITs.  Bolivia has lost its tariff preferences; the same could happen to Ecuador. Ecuador could reverse these circumstances quickly and simply by extending an olive branch to the investors it has alienated, and reaffirming its commitment to international arbitration and the bilateral investment treaties it has renounced. That step would allow the U.S. Chamber to resume its traditional support for trade preferences for Ecuador, and open the door for further cooperation.

Investor confidence begins with rule of law and today, sadly, both are lacking in Ecuador.