Most favoured nations
An international treaty which will liberalise rules on international investments the same way that GATT did on trade is drawing flak.
The Multilateral Agreement on Investment (MAI) is an international economic agreement under negotiation within the Organisation for Economic Cooperation and Development (OECD). Discussions on the MAI were initiated in 1995 and agreement was scheduled to be reached by May 1997. However, due to the delay in reaching consensus on all the provisions of the MAI, coupled with strong protests from NGOs, citizens´ groups and labour unions (especially in the OECD countries), the negotiations were first extended till April 1998 and then until October 1998 (see update Pg53).
The Agreement on Investment is designed to remove all barriers and controls on the movement of finance capital and production facilities. Backed politically by the United States and the European Union, MAI is designed on the framework of the investment provisions in the North American Free Trade Agreement (NAFTA). Unlike NAFTA, which applies only to three countries (Canada, Mexico and the US), however, the MAI would have worldwide application.
Initially, the 29 member countries of OECD – the source of 85 percent of the world´s foreign investment -would adopt the agreement, and then others would be invited to join. Since a majority of restrictions on foreign investments happen to be in the developing countries, critics argue that the MAI is intended to serve as an instrument to further open up their economies to foreign (Western) capital.
What is significant is that there is no participation of developing and other non-OECD countries in the negotiations, which are conducted in secret. But that is hardly likely to matter given that there is growing consensus among the ruling elite of developing countries on the need for foreign investments. Further, because joining MAI will in all likelihood become an international requirement for attracting foreign investment, even the developing countries which are cautious will have no alternative but to accept the Agreement.
It is important to understand MAI in relation to other major developments in the international economic and political spheres. In the present global context, investment and trade liberalisation are the main items on the economic agenda set by the transnational corporations (TNCs) and supported by the G-7, World Bank, International Monetary Fund and the World Trade Organisation. Economic globalisation is no longer seen as merely an economic phenomenon but increasingly as "the next great foreign policy debate".
With the end of the Cold War, the US foreign policy has geared itself for economic diplomacy. The key elements of this approach include pressuring countries to open up their economies to foreign investors in general and, more importantly, in protecting the interests of US investors. This is being achieved through use of a number of instruments, such as diplomatic pressure; political backing to agreements such as GATT, NAFTA, MAI, and the proposed Free Trade Agreement of the Americas (FTAA); and supporting the World Bank- and IMF-led structural adjustment programmes and bailout packages which have an important component of trade and investment liberalisation. Interestingly, the industrialised countries of Europe, though wary of American corporations on home turf, happily join forces with these very organisations when it comes to dealing with the developing world.
It is true that recent years have seen a sudden spurt in private capital flows, especially to developing countries. Private capital flows are now nearly five times the size of official ones. Out of USD 285 billion of total financial flows in 1996, more than 80 percent of the total flows, or USD 244 billion, came from private sources. Foreign direct investment (FDI) continues to be the largest component of net private flows and accounted for 45 percent of total private flows in 1996. Portfolio Investment (PI), negligible during the 1970s and 1980s, had become sizeable by the early 1990s. In 1996, PI totalled USD 46 billion.
The share of developing countries in the global FDI flows is currently almost 40 percent, compared with 15 percent in 1990, and their share of PI flows is now almost 30 percent, compared with around 2 percent before the start of the decade. However, private capital flows are highly concentrated in the East Asian and Latin American region, with the top 10 countries receiving nearly three-quarters of all capital inflows.
Another major development is the rapid liberalisation of trade through various regional and international agreements such as nafta, GATT and now, WTO. These agreements include investment liberalisation measures. Similarly, a number of international investment agreements (both bilateral and regional) have been signed in recent years. In 1996, there were 1160 bilateral investment treaties, out of which nearly two thirds were signed in the 1990s. Since there is no multilateral investment agreement which protects and institutionalises the interests of global investors, the MAI (as a multilateral agreement) will liberalise rules related to investment in the same way that GATT did on the trade front.
Outwardly, investment liberalisation and trade liberalisation may look like two different things but, in actual fact, they complement and reinforce each other to strengthen economic globalisation. Free trade tends to encourage foreign investment, and foreign investment tends to encourage trade. Since TNCs dominate much of world trade and foreign investment, a combination of investment liberalisation and free trade will enable TNCS to expand and restructure their operations on a world-wide scale. By making capital mobility a legally enforceable global property rule, the TNCs will further consolidate their power. There is, meanwhile, very little evidence to support the assertion that investment liberalisation benefits the host countries.
Key provisions:
impact and implications
Let us examine the main proposals laid down under the MAI, their impact and implications.
Definition of investment: The MAI definition of investment says, "Investment means: Every kind of asset owned or controlled, directly or indirectly, by an investor." In simple terms, it includes FDI, PI, intellectual property rights such as patents and trademarks, and contract rights and concessions rights. Any move by governments which can affect any of these "assets" is covered by the MAI. Thus, regulations on labour, environment and repatriation of profits besides controls on hot money flows would have to abide by the MAI.
National treatment: Under this rule, a country that signs the MAI has to give foreign investors "treatment no less favourable than the treatment it accords [in like circumstances] to its own investors." In simple terms, foreign investors and companies are to be treated in the same manner as domestic ones. The rule says that any special concessions and protection accorded to domestic companies and any laws meant to promote domestic companies could be challenged because they discriminate against large foreign investors and companies.
For instance, if India joins the MAI, the government will have to remove existing restrictions which prohibit foreign companies to own agricultural land and property; foreign investment curbs in certain sectors (e.g. insurance) will have to go; and it will not be able to extend economic assistance, for instance, to the weak domestic small-scale industry. Surprisingly, while governments are prohibited from discriminating against foreign investors, there is no rule under the MAI, to stop governments from treating foreign corporations more favourably than domestic ones. There are ample instances where the Indian government has offered special taxes and other concessions to foreign investors in recent years, such as in the power sector.
Performance requirements: No performance requirements, that is, conditions imposed by governments on foreign and domestic investors to get a better deal for the country and public at large, will be allowed under MAI. Performance requirements could include export obligations, equal pay for equal work, preference to local people in employment, location of an industry in a ´backward´ region, and so on. Although these requirements are intended to benefit the host country and its people, the TNCs tend to view them as inefficient and unnecessary.
In India, the government has often imposed export obligations on TNCs for two reasons: first, to avoid downward pressure on the balance of payments; and second, to ensure that corporations earn enough foreign exchange to balance the foreign exchange outgo in terms of repatriation of profits and other payments. In India, the tendency has been for TNCs to make all kinds of false promises and to undertake obligations in order to gain entry into a market. Once they have a foot in the door, they have tended to forget their commitments. Presently, Pepsico, along with other TNCs such as Nestle, Whirlpool and Bio Con, are being investigated for violations of export obligations.
Disregard for obligations is a serious matter and need not be taken lightly by policy makers and law enforcement agencies. What is worrisome is that, instead of pushing rules to ensure that the foreign corporations meet their performance requirements, the MAI proposal seeks to remove these obligatory provisions altogether. Under the MAI, governments cannot impose export obligations or other performance requirements on foreign investors, even if the same requirements are applied to domestic investors.
Similarly, under the MAI, governments cannot insist that a TNC take on a local partner or form joint ventures; hire a certain number of local people; invest a minimum amount in the local community; or, transfer technology to the government or local companies. The extent to which the MAI would limit performance requirements is still under negotiation.
Expropriation and compensation: Under the MAI, governments which take over a foreign investor´s property will have to pay adequate compensation immediately. The rule of expropriation under the MAI is based on the investment rules of NAFTA, which is the first agreement that entitles companies to sue governments they believe are raising unfair barriers to trade. Surprisingly, expropriation would be defined not just as the outright seizure of property but would include governmental actions "tantamount to expropriation". By broadly defining expropriation, the MAI opens a new door for foreign investors to challenge governmental regulations and seek compensation. A recent case filed by a US corporation against the Canadian government under the provisions of NAFTA explains the ramifications of this MAI provision. When the Canadian government in April 1997 banned the import of a potentially toxic gasoline additive, its US manufacturer sued for USD 251 million, claiming "expropriation" of its "property" (namely, its anticipated profits). Realising that its chances of success were slim, the Canadian government entered into a compromise with the company, allowing resumption of sale of the additive, and paying USD 13 million in compensation, in addition to announcing that the additive posed "no health risk". This particular case could well serve as an eye-opener to governments seeking to join the MAI.
Dispute resolution: If a foreign investor believes that a host country is violating the MAI, it can either complain to its own government, which, in turn, can take the other country to binding international arbitration; or, the investor can directly challenge the host country. In either case, investors have an 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 worse than the GATT mechanism under which governments can file complaints against other governments. The MAl´s dispute resolution process does not provide any role for citizens or public access to disputed cases. Furthermore, the resolution system is one-sided as it does not allow citizens or governments to use the dispute procedures to sue foreign investors for not following local rules and regulations. This mechanism clearly puts foreign investors in an advantageous position vis-a-vis citizens and governments.
Apart from those mentioned above, there are other provisions in the MAI which need close scrutiny. The most favoured nation (MFN) clause requires countries to treat all foreign countries and investors in the same manner, preventing the country from using human rights, environmental or labour standards as investment criteria. The MAI proposes doing away with all restrictions on the repatriation of profits or the movement of capital. Under the proposal, countries cannot prohibit or delay an investor from moving profits and assets from an operation, or sale of a local enterprise to the investor´s home country. "Roll-back" and "standstill" provisions require countries to eliminate laws that violate MAI rules (either immediately or over a period of time) and to refrain from passing such laws in the future. Although coutry-specific exemptions for some existing laws are under negotiation, national, state and local laws would be drastically changed in tune with the rules of MAI.
Opposition
Human rights and legal groups have sharply criticised the MAI for provisions which come into fundamental conflict with the objectives of the international human rights regime. They argue that the rules of the MAI will undermine the widely-ratified international treaties on economic, social and cultural rights, as well as the conventions on racial discrimination and on gender equality. These instruments encourage national governments to provide special protection to socially disadvantaged groups, whereas the MAl´s MFN provision also prohibits the state from utilising human rights criteria in the formulation and execution of investment policies.
A number of social activists, NGOs, labour groups and political parties within the OECD countries have rejected the mai and launched campaigns against the draft instrument. These critics contend that the MAI does not contain language on the responsibilities of investors regarding fair competition, treatment of employees, environmental protection and other critical issues. Although there is a discussion within OECD on including an existing OECD code of corporate responsibility in the MAI, critics rightly argue that these provisions would be non-binding.
While maintaining a common position of "No" to the MAI in its present form, some groups, realising the need for an international investment treaty to make the global flows of capital accountable and responsible, are demanding strong, enforceable rules requiring investors to behave responsibly in both home and host countries. In this direction, a citizens´ MAI with emphasis on the citizens´ rights and democratic control was recently prepared.
Even if the negotiations at the OECD break down, many of the mai provisions could be pushed through other forums, including the WTO. Therefore, it is important to monitor the developments very closely. The campaigns against the MAI are yet to develop and gather momentum in the non-OECD countries. It is high time that social movements, labour groups, political parties and others initiate a wider debate on the MAI and its implications.
MAI update
The October negotiations on the MAI turned out to be a one-day informal meeting with nothing concrete on how to proceed further. Interestingly, much before the meet, the French government announced its withdrawal from the negotiations. France´s withdrawal, along with the failure of the talks in October, is being taken as a major victory and there is a mood of celebration among some citizens´ groups, labour unions and political groups, particularly in the member countries of the OECD, which have opposed the MAI.
It would be naive to assume, however, that the MAI is dead. The negotiating group is meeting again in December 1998 and there will be more meetings to initiate the process of transferring the mai to the WTO. The groundwork to include investment regulations in WTO´s millennium agenda is being worked out, and a formal announcement to this effect is expected during the WTO Ministerial Meeting in Washington DC next year. Discussions on the new MAI are likely to begin at the WTO Ministerial Meeting (Millennium Round) at the same venue in 2000.
At the same time, however, realising that it is relatively easier to get an agreement from a select 29 member countries of OECD rather than through the WTO (with has a membership of over 100 countries, including many developing countries that are likely to oppose some of the basic provisions of the MAI), the US is still trying to get the agreement through the OECD.