Writing the Constitution of a Single Global Economy : A Concise Guide to the Multilateral Agreement on Investment - Supporters' and Opponents' Views

by Michelle Sforza, Scott Nova, and Mark Weisbrot⁽²⁾

The New York Times' Thomas Friedman calls economic globalization "the next great foreign policy debate." The world economy is changing with amazing speed, and with profound implications for the social, economic and political life of nations. With the end of the superpower conflict, the key foreign policy questions facing the United States are increasingly economic, not political. Instead of arms pacts, the most contentious debates in Washington today are over international economic agreements like the General Agreement on Tariffs and Trade (GATT) and the newly proposed Free Trade Agreement of the Americas (FTAA).

For years, American critics of globalization have assailed these agreements as a threat to the economic well-being of the nation. Defenders of globalization have argued the opposite: that these pacts herald a new age of growth and shared prosperity. Increasingly, however, economists, political leaders and advocates on both sides of this debate are recognizing the need for a thorough and reasoned examination of where globalization is taking the country.

Increasing inequality both nationally and globally, recent high-profile legal cases in which countries have used international agreements to challenge other countries' regulatory safeguards, and the apparent failure of NAFTA to deliver on its promises of job growth and reduced immigration pressure from Mexico have led even some long-time advocates of free trade and economic integration to call for a reassessment of our current course.

In a widely read article in the Atlantic Monthly, billionaire financier George Soros sounded alarms about the social disintegration that he argues is the byproduct of rapid economic deregulation. And the Institute for International Economics, a leading advocate of increasing global economic integration, asked in a book published in March, Has Globalization Gone Too Far? In this book, Harvard economist Dani Rodrik supports globalization as a whole but recognizes that the process causes significant losses among certain sectors of the population. He criticizes the economics profession for ignoring the risks and losses associated with globalization, and urges that governments expand social insurance programs and take other measures to protect those who are most at risk.

Meanwhile, intellectual leadership among globalization's critics has passed from rhetoricians like Ross Perot and Pat Buchanan to thoughtful scholars and advocates from academia and the public interest world who are raising a host of important questions about the economic, environmental and social implications of economic integration. These advocates argue that while NAFTA and GATT may not have produced any giant sucking sounds, the rumble of economic dislocation is clearly audible in many workplaces and communities.

The maturing of the debate over globalization presents an opportunity for the country - a chance to ensure that the crucial decisions we make about our economic future are the product of a comprehensive discussion involving an informed and engaged American public.

It is against this backdrop of heightened interest in, and debate about, globalization that the Organization for Economic Cooperation and Development (OECD) has embarked upon a major new initiative that warrants but has not yet received extensive public scrutiny: the Multilateral Agreement on Investment (hereafter "MAI"). In the following we summarize the purpose, provisions and history of this proposed investment agreement, and present the sharply contrasting views of supporters and opponents.

What is the MAI?

The MAI is a new international economic pact currently being negotiated at the OECD. It is designed to ease the movement of capital - both money and production facilities - across international borders by restricting laws in participating countries that are viewed as impediments to capital flows. The proposed agreement's primary governmental backers are the United States and the European Union.

The MAI is based on the investment provisions of the North American Free Trade Agreement (NAFTA). The MAI amplifies these provisions and, unlike NAFTA, which only applies to the U.S., Mexico and Canada, would apply them worldwide. The 29 mostly high-income countries that comprise the OECD would join first and then participation in the MAI would be offered to poorer nations.

According to OECD officials, the MAI negotiators are considering rules that would "go well beyond the...provisions of other international agreements" and would "provide path-breaking disciplines on areas of major interest to foreign investors."⁽³⁾ (emphasis added)

The MAI and the Global Economy

Over the last few decades there has been a rapid increase in the movement of capital, as well as goods and services, across international borders. For the United States, imports have more than tripled as a percentage of our economy since 1965. Foreign direct investment has also surged worldwide in recent years, growing 80% over the past decade.⁽⁴⁾ These trends, together with policy changes, such as NAFTA, meant to facilitate them, make up what is commonly referred to as "globalization," and there is heated debate among policy makers as well as non-governmental organizations as to the effects of this process on living standards, income distribution, democracy, and the environment.

Proponents' Views of Globalization

For proponents of globalization, the process is not only inevitable - since it is seen as a direct product of the steady march of technological innovation - but overwhelmingly beneficial. Proponents acknowledge that not everyone gains from the increasing integration of the world economy - unskilled manufacturing workers in high wage countries, for example, may be displaced. But they argue that the gains from increasing competition and the more efficient allocation of resources are far greater than the losses faced by any particular group.

Critics of the MAI insist that far more consultation with labor, environmental and other public interest groups should have occurred, that business associations have had a privileged role in influencing negotiations and privileged access to information,⁽⁹⁾ and that efforts to inform elected officials and the public should have been undertaken before the U.S. determined its negotiating positions on key issues. They point with alarm to the fact that almost no one, even in policy circles, has heard of the agreement. Critics also note that among the 36 advisory committees influencing U.S. negotiating positions on trade and investment policy, only one committee is formally charged with assessing the impacts of multilateral agreements on the environment. By the same token, critics argue, there is only a handful of labor representatives on the advisory committees who cannot possibly counter the disproportionate influence wielded by the more than 500 business representatives.

The MAI's Key Provisions

There is no dispute about the intention of the MAI. Its drafters clearly seek to remove obstacles to the increasing integration - i.e. globalization - of the world economy.

In order to accomplish this goal, the agreement would establish a set of rules limiting the ability of governments to restrict foreign investment. These rules would in effect also curtail, to a certain extent, a nation's regulatory authority over both foreign and domestic corporations that do business within its boundaries.

From the perspective of proponents, these rules will do no more than insure a level playing field for international investors and protect the security of investments in countries that are party to the agreement. Furthermore, the final treaty will undoubtedly include many country-specific reservations and exceptions to the rules, which proponents maintain will address the concerns of critics. Opponents maintain that the effect nevertheless will be to subject regulatory safeguards in members countries to international challenge, and to restrict the ability of countries to make future economic policy in the national interest.⁽¹⁰⁾

Key MAI rules include:

• National Treatment, which requires countries to treat foreign investors and investments no less favorably than domestic ones. Under national treatment, countries could not, for example, place special restrictions on what foreign investors can own, maintain economic assistance programs that solely benefit domestic companies or require that a corporation hire a certain percentage of managers locally. Under the current text, laws that have a discriminatory effect on foreign investors would be prohibited whether or not such discrimination is intentional. While governments would be prohibited from discriminating against foreign investors, there would be nothing to stop governments from treating foreign corporations more favorably than domestic ones (for example, by offering special incentives to attract foreign investment).

• Most Favored Nation (MFN), which requires governments to treat all foreign countries and all foreign investors the same with respect to market access and to regulatory laws. Laws prohibited by MFN would include economic sanctions that punish a country for human rights violations by preventing corporations from doing business there. One example of sanctions that could be forbidden under the MAI are the recent efforts by New York City and California to impose sanctions on Swiss companies for their failure to compensate Holocaust victims and their heirs for claims arising from the actions of these companies during the Nazi era.

• Limitations on performance requirements, which are laws that require investors to meet certain conditions if they want to establish an enterprise in a particular locale or if they want to be eligible for tax incentives or other government aid (for example, low-interest development loans). A requirement that corporations use some percentage of domestic inputs is an example of a performance requirement that would clearly be banned by the MAI, as drafted. Negotiators are still discussing which other performance requirements will and which will not be prohibited.

• A ban on uncompensated expropriation of assets. The MAI would require governments, when they deprive foreign investors of any portion of their property, to compensate the investors immediately and in full. Expropriation would be defined not just as the outright seizure of property but would also include governmental actions "having equivalent effect" of expropriation. Whether this would impact the passage of regulatory laws that cost an investor money and, if so, where the line would be drawn, is a subject of debate among observers of the MAI. A lawsuit filed under NAFTA by the Ethyl Corporation and settled in Ethyl's favor by the Canadian government serves as an example of the potential use of the MAI's expropriation provision (See page 18).

• A ban on restrictions on the repatriation of profits or the movement of capital. Countries would not be able to prevent an investor from moving profits from the operation or sale of a local enterprise to that investor's home country. Nor could countries delay or prohibit investors from moving any portion of their assets, including financial instruments like stocks or currency.

• Investor-to-state dispute resolution. The MAI would enable private investors and corporations to sue national governments, and seek monetary compensation, in the event that a law, practice or policy violates investor rights as established in the agreement. International investors would have the option to sue a country before an international tribunal rather than in the country's domestic courts. This investor-to-state dispute resolution mechanism is a departure from most previous international economic agreements, including GATT, which allow only governments to bring complaints against other governments. NAFTA employs investor-to-state dispute resolution in limited cases, but only applies to three countries.

• "Roll-back" and "standstill" provisions, which are designed to further liberalize the rules for international investment and to ensure that transnational investors have access to new markets as they emerge. These provisions would require nations to eliminate laws that violate MAI rules (either immediately or over a set period of time) and to refrain from passing any such laws in the future. State and local, as well as federal laws, would probably be affected.⁽¹¹⁾ Country-specific exemptions will be made for some existing laws as part of the negotiating process.

• In its current form, the MAI does not contain language on the responsibilities of investors regarding fair competition, treatment of employees, environmental protection or other issues. There is discussion of including an existing OECD code of corporate responsibility in the MAI, but these provisions would be non-binding.

How these various MAI provisions would impact businesses, workers, consumers, the environment and the general public is an area of intense disagreement among opponents and supporters of the agreement.

Proponents' Views of the MAI

The Need for Investment Protection

For proponents of the MAI, a set of global rules governing investment is needed to lock in the liberalization that has already taken place over the last two decades; protect the rights of investors to free, equal and safe access to markets; and resolve the conflicts that are inevitable between governments and transnational corporations (TNCs). The primary purpose of such an agreement would be to reduce the distorting effects of such policies as requiring foreign investors to form partnerships with local firms, or performance requirements (like maintaining certain employment levels) which require TNCs to respond to a discipline other than that of market forces in making their production decisions.

Business and industry groups argue that an MAI is a necessary step toward minimizing the substantial risks of investing overseas. The MAI would require governments to make all laws and regulations publicly accessible. Such transparency would protect investors from the capricious and economically harmful application of regulations of which they had no prior knowledge. Proponents further argue that the mandatory and timely compensation for expropriation guaranteed by the MAI would encourage and protect foreign direct investment in nations with less stable economic, political and legal institutions.

The Economic Benefits of Foreign Direct Investment

Proponents cite a number of ostensible advantages to encouraging the spread of foreign direct investment through an MAI. American business leaders argue that the agreement would reduce the obstacles to overseas investment that US firms currently face. In some cases, other countries do not offer foreign investors the same degree of access to markets that investors enjoy when they do business in the U.S. There are a number of benefits that are said to follow from lowering these barriers.

The protections provided to investors under the agreement would lower both the cost and risks associated with such investment. Foreign operations account for a substantial and growing share of many U.S. corporations' sales revenue, profits, and royalties, and all of these would increase with the successful implementation of an agreement.

These benefits, proponents assert, would spread to the rest of the American economy through the growth and job-creation effects of increased exports. It is assumed that exports would increase, since a large part of US exports is comprised of shipments from domestic companies to their foreign affiliates. It is also often asserted that jobs created by exports pay higher than average wages. Also, the direct investment of foreign firms in the United States, which would theoretically increase under the MAI, creates jobs in the domestic economy and can be a catalyst to economic development at the local level.

Proponents also cite the benefits of technological "spillover" effects. These occur, for example, when technology transferred from a foreign investment project improves the efficiency of local firms. Although these effects are difficult to measure - research in recent years has measured them only indirectly in their effects on local economic growth (see, e.g., Borenszstein, De Gregorio, and Lee [1994]) - they have become one of the major attractions for underdeveloped countries seeking foreign investment.

Business proponents of the MAI oppose the inclusion of labor and environmental standards within the agreement.⁽¹²⁾ They argue that an investment pact is not the proper place to address such issues, which should be taken up by institutions specifically designed to deal with labor and the environment.

Opponents' Views of the MAI

Investor Rights without Investor Responsibilities

Opponents believe that countries often have legitimate reasons for treating foreign investors differently from domestic firms or for imposing performance requirements on investors, and that by limiting such policies the MAI would sharply restrict the ability of governments to shape investment policy to promote social, economic and environmental goals.⁽¹³⁾ Opponents view the MAI as an attempt to create rights for TNCs and other investors and to defend these rights even when they are in conflict with the rights, needs or interests of individual nations and their citizens.

Opponents consider it highly significant that the MAI provides binding legal protections for the rights of investors, but imposes no binding obligations on investors with respect to labor rights, environmental standards or anti-competitive business practices. To opponents, this imbalance reflects a conscious effort by the MAI's drafters to place investors' rights in a privileged position relative to environmental, labor and other concerns.

The MAI and the "Race to the Bottom"

Opponents further argue that by increasing the ability of investors to shift production around the world, the MAI will hasten the "race to the bottom," wherein countries are pressured to lower living standards and weaken regulatory regimes in an effort to attract needed investment capital. In this view, even regulatory laws that are not in direct conflict with the MAI could be threatened by an increasingly intense competition for capital.

Opponents do not accept the idea that increasing the flow of capital around the globe will necessarily benefit the American public. They point to the fact that the U.S. trade deficit has grown substantially with increasing trade in good and services, costing millions of jobs. Exports have grown, as defenders of globalization predicted, but imports have grown faster. Opponents argue that similar effects are likely with respect to direct investment. They argue that there is no reason to believe that increasing the mobility of capital will send more investment into the U.S. economy than out of it. Since the MAI is designed in part to make it easier and safer for investors to shift production to developing countries, opponents assert, the MAI would actually hasten the flight of jobs from the U.S.

The MAI and the Threat to Sovereignty

Opponents believe that in order to comply with MAI rules, federal, state and local governments in the U.S. would have to forego laws and policies in a number of areas - including environmental protection, local economic development and human rights. While the U.S. will likely seek exemptions for some existing statutes, time limits may be applied to these exemptions. Furthermore, governments would be constrained from enacting most such laws and policies in the future.

Opponents are particularly concerned that corporations would abuse the power, granted them under the MAI, to sue governments for damages. They fear that investors would take an expansive view of the MAI's definition of investors' rights and bring legal challenges that the MAI's drafters may not anticipate. Opponents also worry that investors could use the threat of potentially costly lawsuits to intimidate governments that are considering the passage of new regulatory laws.

Domestic Laws that May Violate the MAI

Opponents cite a host of American laws that they believe could be subject to challenge under the MAI.

Some laws that protect the environment and public health could be ruled to be discriminatory against foreign investors, to constitute expropriation of investor assets, or to be illegal performance requirements, opponents argue. Examples include:

• Bans on the production or sale of dangerous products;
• Laws designed to conserve valuable natural resources or land; and
• Requirements that recycled content be used, when possible, in the production process.

In addition, the MAI, as drafted, does not include the exceptions usually included in trade agreements that allow governments some leeway with respect to environmental and public health protections.

Opponents also cite a range of laws encouraging local economic development, that because they may put foreign investors at a competitive disadvantage, could be subject to challenge under the MAI. These include:

• Programs earmarking economic development funds for local businesses;
• Community reinvestment laws requiring banks to invest in economically deprived areas;
• Set-asides for minority- and women-owned businesses;⁽¹⁵⁾
• State and municipal programs earmarking loans and subsidies to home-grown businesses; and
• Set-asides, targeted loan and grant programs, and special regulatory relief for small businesses.

Laws designed to enhance financial and economic security could also be illegal under the MAI, opponents assert. Laws that could be challenged include:

• "Speed bumps" or other restrictions on short-term stock, bond and currency transactions which countries use to avoid financial crises and
• Laws designed to protect jobs by requiring corporations that move jobs out of a country to pay tax penalties.

Opponents believe that the MAI may also prohibit unilateral sanctions against human rights violators, including:

• Laws that block investment in the U.S. by companies based in such countries.
• Laws that penalize investors - domestic and foreign - for economic relationships with dictatorial regimes.
  

Counterarguments

Proponents dismiss many of these fears, especially those regarding environmental or safety regulation, as exaggerated. They claim that legal challenges will be rare. They argue that the only laws that will be successfully challenged are those that should not have been in place to begin with, since they cause wasteful distortions in the allocation of investment resources.

Many of the MAI's supporters also argue that unilateral trade or investment sanctions are not the best way to pursue a foreign policy objective such as pressuring another country to respect human rights. There are other forums and venues in which to accomplish these aims - for example in the United Nations. The problem with allowing countries to implement unilateral trade or investment sanctions, in addition to the historical evidence which often shows that they do not work, is that these policies can be used as a cover for underlying commercial purposes.

Indeed, one of the main purposes of establishing a set of rules like the MAI is to eliminate, as well as prevent, a plethora of restrictions that are justified on the basis of other objectives - environmental protection, employment goals, etc., but are actually pretexts for protectionism. Proponents argue that it is only these disguised forms of protectionism, or the use of investment-distorting measures when other, non-distorting policies would be at least as effective, that such an agreement seeks to eliminate.

Recent Legal Cases Under Economic Agreements

Opponents claim that cases under the NAFTA and GATT dispute resolution systems are relevant for predicting the MAI's potential impact upon domestic regulations. They cite three recent legal cases to support their argument that the MAI could be used to challenge popular U.S. laws.⁽¹⁶⁾

In January 1997, the U.S.-based waste disposal company Metalclad Corporation filed a grievance with ICSID, alleging that the Mexican state of San Luis Potos� violated a number of provisions of NAFTA when it prevented the company from opening its waste disposal plant. On the basis of a geological audit performed by environmental impact analysts at the University of San Luis Potos�, the Governor deemed the plant an environmental hazard to surrounding communities, and ordered it closed down. The study had found that the facility is located on an alluvial stream and therefore could contaminate the local water supply. Eventually, the Governor declared the site part of a 600,000 acre ecological zone. Metalclad seeks compensation of some $90 million for expropriation and for violations of national treatment, most favored nation treatment and prohibitions on performance requirements.

MAI opponents also point to the Ethyl v. Canada case as an example of what would happen under the MAI. In April 1997, the Ethyl Corporation, an American chemical company, filed a lawsuit against the Canadian government under the terms of NAFTA. The Canadian government had just banned the import and transport within Canada of the gasoline additive MMT on the grounds that it is a dangerous toxin (MMT is currently banned in California). Ethyl sued the Canadian government for $251 million, arguing that MMT is safe and that Canada's ban on the additive constituted an illegitimate expropriation of Ethyl's assets. Ethyl had tried, unsuccessfully, to use the threat of a suit to dissuade the Canadian Parliament from passing the ban in the first place. In July 1998, the Canadian government announced it would settle the case, pay Ethyl $10 million and announce that MMT is safe. Opponents fear that under the MAI, TNCs in the 29 OECD countries would be emboldened by Ethyl's victory and use the power conferred by the agreement to challenge environmental and other safeguards.

MAI critics also point to the World Trade Organization's decision on hormone-fed beef. The WTO decided that the European Union's ban on the sale of hormone-fed beef is an unfair trade barrier and illegal under GATT, even though the ban applies equally to both imported and domestic beef. The WTO based its decision on its conclusion that there is insufficient scientific evidence that hormone-fed beef is dangerous to human health, ignoring overwhelming public sentiment in Europe in favor of the ban. Critics of globalization argued two years ago that creating the WTO and investing it with the power to make such decisions would result in major infringements on the sovereignty of national governments. They view the hormone-fed beef decision as a perfect example of the types of precautionary regulations that would be overridden by international economic agreements. Opponents believe that the MAI, with its investor-to-state dispute resolution mechanism, will create a vehicle more powerful than the WTO for challenging national laws.

Proponents of the MAI would defend the WTO's ruling on the grounds that the decision was based on the best available scientific evidence. In this view, that is exactly the purpose of establishing such a dispute resolution mechanism: to ensure that only legitimate health or safety concerns, supported by scientific research, can be used to bar the entry of another country's products.

The Need for a Vigorous Public Debate

It is clear from the foregoing discussion that there will remain sharp disagreements over the likely impact of the MAI on living standards, income distribution, democracy, and the sovereignty of national and local governments. Opponents believe that the agreement will have a negative impact in all of these areas, while proponents argue that it will contribute to worldwide economic growth without these unfavorable repercussions.

Given these sharply diverging views, an extensive and well-informed public debate on the issue is essential. That the public should be aware of the MAI and able to participate in a constructive dialogue about its implications for the country may be one of the few areas of agreement among the proposed pact's supporters and critics.

Notes

1. A quote from a speech by Renato Ruggerio, Director General of the World Trade Organization, December 1996.