MAI Proposals and Propositions
An Analysis of the April 1998 Text 1
It was with high expectations that the Organization for Economic Cooperation and Development (OECD) launched negotiations on the Multilateral Agreement on Investment (MAI) in 1995. The MAI was, in the words of its OECD architects, to create "state of the art" standards for the treatment and protection of foreign investment 2. It was also to set into motion a mechanism for the progressive liberalization of investment regimes by establishing rights for foreign investors and by constraining the power of governments to regulate the activities of foreign, and in some cases, domestic investors. Proposed MAI provisions would, for instance, significantly limit stock market safeguards, performance requirements on foreign direct investment, restrictions on foreign ownership of real estate and even strategic industries, and direct controls on the movement of capital.
The MAI was conceived not only to enshrine many policies already in effect among OECD member-countries, but to devise rules to protect and encourage investment in the developing world. The U.S. and European Union (E.U.) have identified dynamic non-member economies of Asia and South America for accession to the MAI.
When the first analyzes of the MAI were conducted, no draft text of the MAI had ever been accessible to the public. Writings about the MAI’s projected effects were based on preparatory texts published by various OECD investment working groups, which described the MAI as an agreement unprecedented in terms of scope, in the strictness of its standards for investor treatment and protection, and in its mechanisms for continued liberalization. According to these documents, the blueprint for the MAI’s provisions would be the investment chapters of the North American Free Trade Agreement (NAFTA), and the WTO would be the model for its scope. Yet the MAI was to go further than both of these agreements 3.
The first MAI working draft that was leaked to the public in February 1997 closely conformed to the OECD working groups’ proposals. A second draft was leaked in May 1997, and reflected only a slight scaling-back of the OECD’s aspirations 4. In February 1998 -- a full year after the previous texts had been made available on an NGO’s website -- the OECD publicly released a new draft of the MAI. However, this was scrubbed clean of references to the negotiating positions of individual countries.
When it became clear that member governments would not be able to sign a completed MAI as planned at the April 1998 OECD Ministerial, OECD Ministers agreed to six months additional negotiations and consultations to resolve outstanding issues and to shore up support for the MAI domestically 5. In a clever public relations move, another version of the MAI text, dated 24 April 1998, was released at the Ministerial and posted on the OECD’s website. In almost all important respects, the April 1998 MAI text is essentially unchanged from previous drafts. However, the OECD did add an annex containing various OECD and country "proposals" and an annex of the "Chairman’s proposals" for addressing NGO criticisms on such issues as labor and environmental standards, the expropriation and general treatment clauses and investor-state dispute resolution. Many of these proposals have been under discussion for the past six months or more; None of them have been agreed to or incorporated into the binding provisions of the MAI. Thus, the architects of the MAI have stuck to their initial objectives.
This analysis of the MAI is divided into two parts. The first will explain core MAI provisions as they appear in the most recent version of the MAI text. We consider provisions that the negotiating countries have agreed upon to be "core provisions." Some undecided elements of these provisions remain in the April 1998 text. We note these and describe changes that have been made relative to past texts. In the second part, the list of proposals submitted by different countries and the OECD on environmental, labor and other issues are analyzed.
Part One: Core Provisions of the MAI Text 6
Introduction: The Definition of Investment
The MAI’s Scope and Coverage (Chapter II) provisions establish an exhaustive definition of "investment" for the agreement. It includes "every kind of asset owned or controlled, directly or indirectly, by an investor" (Chapter II. Definitions 2; emphasis added). The definition of investment means MAI rules would cover real estate and natural resources like minerals and oil (Chapter II. Definitions 2(vii); (MAI Commentary Chapter II. Definitions-Investment 14), portfolio investment and minority stock holdings (Chapter II. Definitions 2(ii) and (iii); MAI Commentary Chapter II. Definitions-Investment 8), all forms of intellectual property rights like patents, brand names and "good will," (Chapter II. Definitions 2(vi); MAI Commentary: Chapter II. Definitions-Investment 12) as well as direct foreign investment in services or manufacturing enterprises.
In addition, the MAI’s definition of investment includes the products of an investment (MAI Commentary: Chapter II. Definitions-Investment 1). This expanded definition of investment broadens the bases on which a country’s measures or laws could be challenged as violating MAI rules, thus increasing the potential liability of governments that sign on to the agreement.
The MAI’s rules also apply to investments indirectly controlled by an investor from a signatory nation. This further extends the benefits of MAI rights to investors from countries that may not be official signatories to the MAI. According the MAI’s commentary, there is wide support for covering an "investment by an investor established in another MAI party, but owned or controlled by an non-MAI investor" (MAI Commentary: Chapter II. Definitions-Investment 2(a)) (emphasis added). This means that, for example, a Chinese company could accrue MAI benefits in the U.S., simply by investing in another country that is a party to the MAI. This loophole would make it extemely difficult for governments to maintain and enforce national security policies that limit economic relations with certain nations, as well as to enforce economic sanctions on countries that sponsor or harbor terrorists or that are consummate human rights violators. In addition, this provision will encourage the establishment of "shell corporations" in MAI member countries for the express purpose of accruing MAI benefits.
Likewise, there is wide support to include in the MAI’s definition of "investment" investments "by an investor established in a non-MAI Party, but owned or controlled by an investor of a third MAI Party" (MAI Commentary: Chapter II. Definitions-Investment 2(b). This would enable a non-MAI signatory to accrue MAI benefits simply by undertaking a joint venture with an investor from an MAI-member country. Taken together, these interpretations of indirect investment will essentially a nearly limitless list of investors, to benefit from, and have legal standing under, the MAI.
Under the MAI not all assets are treated as investments. An individual whose vacation home in a foreign country was seized by the government to, say, build a road would not enjoy the same protections as a foreign investor whose commercial property was seized or whose investment was regulated in a manner that decreased its value. To be considered a protected investment under the MAI, an asset must have the characteristics of an investment, including the expectation that it will generate a stream of income (Chapter II.2 footnote 2).
I. The MAI’s Investor Treatment Guarantees (Chapter III)
The MAI would establish two categories of rights for foreign investors. The first category endows foreign investors with rights relative to those conferred upon domestic investors. Under this category of rules, which includes National Treatment and Most Favored Nation (MFN) rules (Chapter III, National Treatment and MFN Treatment, 1-3), a foreign investor must be treated "as favorably as" (or more favorably than) a domestic investor.
The second category of rights create absolute standards for the treatment of investors and investment. For instance, the MAI’s performance requirements section (Chapter III Performance Requirements: 1-5), which prohibits governments from placing certain conditions on investment, limits even those performance requirements that are universally applied, that is, are equally applied to both domestic and foreign investment. These latter rights do not address the problem of "discrimination," but limit the extent to which governments can regulate business to achieve economic, social or environmental objectives. Only foreign investors would have standing under the MAI to challenge laws that violate these absolute rights, but the impact of any changes to an MAI member-country’s law or policy would be felt in the domestic regulatory context.
While each aspect of the MAI could impact a government and its laws, generally, the second type of MAI rights (that is, absolute rights) will more deeply affect developed countries because they have already established national treatment and other investment principles. It is the MAI’s inclusion of these absolute rights for corporations as against governments that had led some developing country scholars to call the MAI "the structural adjustment program for the North," referring to the structural adjustment programs the International Monetary Fund (IMF) and the World Bank have imposed on many developing countries. Meanwhile, for developing countries, both categories of investor rights would have major impact with new National Treatment rules undercutting developing country efforts to shape foreign investment to promote basic development.
A. Relative Investor Rights
1. National Treatment (Chapter III. National Treatment: 1 and 3)
The MAI’s National Treatment rule enjoins governments to treat foreign investors no less favorably than domestic investors with respect to all phases and aspects of investment, from initial establishment of an investment to subsequent regulation. However, governments may treat foreign investors more favorably than domestic investors (Chapter III, National Treatment 3).
The National Treatment rules cover government measures that have a discriminatory effect, even if they are facially neutral. As of April 1998, a ban on such de facto discrimination still appears in the MAI, and all parties specifically affirmed it (MAI Commentary: Chapter III, National Treatment 8) 7. Thus, if a nation were to establish overall limits on the extraction of mineral resources, for example, a foreign investor could argue that the law has a discriminatory effect since it denies market access to foreign investors, and thus inadvertently favors domestic investors who may already possess mining concessions. Zoning regulations adopted by many municipalities to protect residential neighborhoods or the "character" of cities may also run afoul of the MAI’s de facto discrimination provision. Most often these laws are directed at excluding large corporations from Main Street commercial areas – the very types of foreign businesses that are large enough to establish enterprises overseas and benefit from the provisions of the MAI.
National Treatment, along with the corollary principle of MFN treatment, form the bedrock principles of economic integration in international law. These mechanisms were adopted from the GATT, and appear in Bilateral Investment Treaties (BITs) as well. In a stunning departure from over 99% of the world’s BITs, however, the MAI would require governments to provide National Treatment during the market entry phase of foreign investment (Chapter III. National Treatment 1). Whereas the vast majority of BITs apply national treatment only after an investor has been granted market access -- the right to establish an investment -- the MAI confers upon foreign investors a general right of entry in all economic sectors. This feature essentially eliminates the borders of the nation-state for the purposes of investment.
The basic question raised by National Treatment, which subjects almost all economic sectors to international competition, is not simply one of discrimination, but of whether limits should be put on international economic competition. The MAI will promote an unfettered market approach to globalization. Yet, questions regarding the degree to which particular markets should be subject to international competition should not be determined in the marginal realm of international investment law, but rather should be addressed in domestic, democratically-accountable fora.
In this context, the claim by MAI framers that National and MFN Treatment simply "level the playing field" between domestic and foreign investors is misleading. National governments discriminate against non-citizens all of the time; a nation’s borders are by definition exclusionary. For instance, immigration law does not guarantee foreign nationals a right of entry at the border. Yet immigration policy per se is never debated in terms of its discrimination in favor of citizens over non-citizens. The MAI would seek to establish such rights for international investors. Framing the discussion of National and MFN Treatment solely in the discourse of discrimination pre-empts the debate as to whether there are some legitimate reasons to reserve the benefits of nationality for domestic investors.
Regulation of Polluting Industries; Cut and Run Forestry: An example of when nationality requirements for investors might serve a compelling public interest is in the area of environmental conservation. The effects of environmental degradation caused by industry often do not arise for years after the polluting occurs. A nation may wish to impose different obligations on foreign investors, who are by definition more mobile, to address future environmental harms or to prevent such practices as "cut and run investment" in the timber industry. Some developing nations have imposed bans on foreign investment in "highly polluting" industries to avoid such problems. Some countries limit investment in the toxic waste disposal industry to domestic companies so that if a problem arises, the government is able to enforce legal judgments against the company. As well, countries with such rules, such as Colombia and Taiwan, fear that if a foreign investor owns a waste facility, it could become more difficult for the host country to keep toxins produced overseas or across borders from being imported into the country without violating the foreign investor’s rights to trade with subsidiaries.
Differences in Economic Development Among MAI Signatories: The MAI is intended as a free standing agreement, meaning it would be open to accession by non-OECD countries, most of whom are developing countries (XII. Accession 1). Yet, the application of National Treatment would invalidate many of the economic development strategies relied upon by these nations, which often involve privileging domestic investors/investment and attaching conditions to foreign investment to achieve domestic economic goals. Developing country critics of the MAI argue that granting foreign investors the same rights as domestic investors would unduly limit their nations’ ability to control the degree and nature of foreign investment and would eliminate any leverage developing countries could muster against abundantly more powerful transnational corporate investors. When European countries and the U.S. were developing, they did not provide National Treatment for foreign investors.
Indeed, many countries (and many U.S. states) still have laws requiring domestic ownership of farm land. In developing countries, the very basis of land redistribution programs is to get farmland into the hands of local residents. Yet, under NAFTA’s investment rules, on which MAI is purposefully modeled, Mexico was required to change the land reform provisions of its national Constitution 8. These reforms, created after the Mexican revolution, were eliminated 9 to allow U.S. and Canadian investors to buy up large tracts of land. In four years of NAFTA, this change has resulted in massive dislocation of peasant farmers as foreign agribusiness companies have once again accumulated large plantations. The MAI’s National Treatment provisions could have similar effects on other developing countries’ land ownership distribution.
Indeed, almost every MAI provision would have a stronger, and potentially much more adverse, impact on developing nations who would sign on to this set of rules whether in the context of an OECD-negotiated MAI or if similar rules are added to the World Trade Organization (WTO) as some nations propose. From the investor-state dispute resolution system, which could strip governments forced to answer legal challenges of scarce fiscal resources, to the performance requirements section, which would impose an outright ban on trade-related performance requirements, to the MAI’s provisions banning restrictions on the management structure of foreign enterprises -- time-tested Third World economic survival techniques (and, indeed, entire economies) could be enormously affected.
Cultural Concerns: Those countries who argue in favor of a cultural carve-out (Annex 1, Culture) to National Treatment rules claim that there are some realms of human activity that one cannot entrust to market forces. While one may or may not believe this argument to be a meritorious one, many OECD members have requested country-specific reservations from National Treatment rules for print and broadcast media, as well as for programs preserving the cultural heritages of indigenous peoples. Despite the fact that most OECD-members resist the complete privatization of the media and cultural products sectors, the MAI’s National Treatment clause, as written, would require nations to open up their cultural sectors to unfettered foreign competition 10. Because cultural industries are a major U.S. export, and because the U.S. cultural industries market is already wide open (with very little threat of competition) the U.S. has been a vocal opponent of a cultural carve out for the MAI. In fact, U.S. media and entertainment firms view the MAI’s grant of new market access in these areas as a major U.S. benefit under the MAI. Their zeal to avoid limits on the MAI’s coverage of cultural industries is fueled by last-minute U.S. concessions during the GATT Uruguay Round negotiations through which "Hollywood was sacrificed" to ensure the pact’s conclusion.
U.S. State Sovereignty and the U.S. Constitution’s Commerce Clause: The Commerce Clause of the U.S. Constitution, which limits discrimination against out-of state firms, is National Treatment’s domestic analogue. The Commerce Clause limits states rights to set regulations affecting interstate commerce.
The Commerce Clause has come under fire by local economic development strategists for significantly limiting how states and localities can stimulate job creation, encourage local capital accumulation and stem capital flight. They argue that limitations set by the Commerce Clause have left states and localities with few effective strategies for economic development. Governments are forced to rely on the costly model of luring out-of-state firms with investment incentives. This approach has been widely criticized as failing to lead to the creation and maintenance of good jobs, and failing to keep businesses from relocating should a more lucrative offer present itself. Yet, the MAI’s National Treatment clause would further foreclose alternative models for economic development by making it even more difficult for governments to favor home-grown, in-state or domestic business or to form public/private partnerships with businesses.
The MAI’s National Treatment provisions are more prohibitive than the U.S. Constitution’s Commerce Clause in several respects. First, when the state is a market participant, it is free under the Commerce Clause to favor local business or discriminate against out-of-state business. The MAI, on the other hand, would forbid a government to favor domestic investors when regulating or when privatizing state enterprises or when purchasing goods or services (Chapter III. Privatisation 1); (Chapter III. Monopolies/State Enterprises/Concessions A2-3(a) and (b)). Second, the U.S. Supreme Court has generally held that state governments can interfere with commerce, and in some cases discriminate against out-of-state business, in the interest of public health and safety. The mere fact that a health and safety measure imposes a greater burden on out-of-state firms is not enough to establish a Commerce Clause violation in U.S. constitutional jurisprudence. Courts have tended to require evidence that out-of-state firms bear the entire burden of the policy when determining whether a violation has occurred. Under the MAI’s rule against de facto discrimination, on the other hand, the mere fact that a policy impacts a foreign-based investor less favorably could be enough to establish a National Treatment violation.
The MAI’s national treatment requirements could require U.S. states to eliminate many policies that base rights on state residency, including some that have been upheld under the Commerce Clause. For example, to obtain a lobster license in Maine, water-use rights in many Western states, a mining or timber concession on state land or a commercial license in many states, one must be a resident of the offering state. Yet, for countries that do not have federal systems of government, the ability of states or local communities to pass such laws is anathema. In fact, the European Union’s annual list of U.S. trade barriers includes a section that specifically identifies U.S. federalism as one of the most troubling barriers to the U.S. market. The MAI could forbid states or local communities from having such different policies, with foreign investors and corporations guaranteed rights a resident of a neighboring state would be denied under the U.S. Constitution (MAI Commentary: Chapter III. 7).
2. Most Favored Nation Treatment (MFN) (Chapter III, Most Favoured Nation 2)
The MAI’s MFN provisions enjoin MAI signatories to treat all investors the same with regard to right of entry and regulation upon entry (Chapter III Most Favoured Nation 2). Investors cannot be denied market access or treated differently on the basis of their nationality. This would end policies that pressure governments to reform by restricting investment in a country or investor from a country based on a human rights or labor records 11. Had the MAI been in effect during the 1980s, successful divestment strategies to pressure the South African government to abolish apartheid would have been forbidden. In the U.S., cities and state governments divested from South African-owned banks, municipalities set up Shell-free zones banning investment by Royal Dutch Shell and its subsidiaries, and state and local governments dropped South African-owned firms as suppliers. All these strategies violate the principle – and the letter – of the MAI, and would have been easily challenged had the MAI been in effect and with South Africa as a signatory.
Of significance to efforts to ensure that public funds are invested in an ethical and socially responsible fashion, a corollary provision in the MAI prevents a government from holding specific foreign investors accountable for their own actions taken in a third country (Annex 1: Secondary Investment Boycotts). Under MAI rules, a foreign company based in an MAI signatory country could not be penalized for its business dealings with, say, the military dictatorships of Burma or Nigeria. While the government may not be discriminating against the investor strictly on the basis of nationality, under the MAI’s proposed ban on secondary investment boycotts (Annex 1: Secondary Investment Boycotts), such discrimination would constitute an extra-territorial application of its laws to the investor’s conduct overseas.
MFN, especially when combined with the ban on secondary investment boycotts, effectively erects a firewall between social policy and commerce. As the relationships between UNOCAL in Burma and Shell Oil in Nigeria demonstrate, dictatorial regimes are often benefitted by the revenue generated by foreign investment. Under the MAI, an outraged public would be stripped of its ability to press for policies in its democratic governmental institutions to protest the collusion between powerful multinational business interests and oppressive regimes. While nations may be able to exercise the MAI’s narrow "essential security" exemption to defend some economic sanctions that punish foreign investors on the basis of their nationality, most sanctions imposed for human rights and labor violations would not likely pass muster under the MAI’s proposed provisions.
3. Temporary Entry, Stay and Work of Investors and Key Personnel (Chapter III, Temporary Entry 1-3) and Nationality Requirements for Executives, Managers and Members of Boards of Directors (Chapter III, Nationality Requirements, unnumbered paragraphs)
One goal of the MAI is to ensure that investors can operate in a foreign country as freely as they would in their home countries. The MAI provisions on Temporary Entry and Nationality Requirements require adjustments to domestic immigration and work permission rules to ensure that this will happen.
The MAI would require countries to eliminate numerical quotas, as well as labor market and employment level-based tests now often used to set quota levels as applied to investors and investments of MAI signatory countries (cite). Many countries require a showing of labor market need for certain specialists not available in the domestic workforce to trigger the raising of caps on professional visas, such as those available for foreign nurses or computer programmers. Although these immigration rules are based on profession and labor market factors, not nationality. The MAI’s rules would require signatory countries to eliminate them as regards investors and investments of other MAI signatory countries. The MAI also urges signatories to grant work authorizations to the spouses of managers, specialists or executives who have been granted temporary stay, entry and authorization to work under the MAI requirements (Chapter III Temporary Entry, 1(b)(ii)). For countries trying to retrain displaced manufacturing workers for service sector computer and other jobs, the MAI could be used to fill such positions with foreign employees.
Additionally, under the MAI, a country may not require an investor to hire local managers, specialists or executives for any reason, including job creation (Chapter III Temporary Entry 1(a)(ii) and 2). This policy, when applied to developing nations who accede to the MAI, would severely lessen the extent to which they can benefit from foreign investment. Such countries often rely on foreign investment for the transfer of intellectual capital, for instance management training, to local nationals.
Likewise, the MAI forbids any signatory from requiring that executives, managers and members of boards of directors be of a specific nationality (Chapter III. Nationality Requirements). Affirmative action-type policies imposing race- or gender-based hiring preferences for higher-level employees could conflict with these nationality requirements.
4. Privatization (Chapter III Privatization, 1-9)
Under the MAI, countries must agree to apply the principles of National Treatment and MFN treatment when privatizing assets (Chapter III Privatization 1).
Many OECD members, especially those in Eastern Europe, have resisted such requirements in the past. They argue that signatories should be allowed to choose the method of privatization that is best for them politically and economically. The technical provisions on specific mechanisms for privatization contain many undecided issues. However, the coverage of the draft language is extensive. For instance, one mechanism involves selling vouchers to the public (Chapter III Privatization 2 and 7). This enables the government to privatize the asset, but the community would retain control. The U.S. argues that "voucher schemes" violate the principle of de facto National Treatment by restricting the realm of potential buyers to non-citizens (Chapter III Privatization 5).
Another privatization method, termed "golden shares," could also be threatened under the proposed rules (Chapter III Privatization 5). This method involves selling the asset to a private investor, with the government retaining enough control to ensure that the asset is not subsequently sold to an investor deemed inappropriate. The U.S. has argued that this provision also holds out the possibility of discrimination against foreign investors in that governments could use their "golden shares" to block the subsequent sale of a privatized asset to a foreign investor.
There has been very little change in the MAI text on Privatization over the past year. The U.S. seeks language to force countries who wish to pursue privatization methods that do not rely solely on the competitive bidding process to claim country-specific reservations in order to be able to do so, with the expectation that such reservations will be gradually rolled-back. But proponents of a more flexible approach to privatization still insist on provisions clarifying that alternative methods of privatization are consistent with MAI provisions on National Treatment and MFN treatment.
It remains to be seen how OECD delegates will resolve these politically sensitive issues relating to privatization. However, it is clear that the question of the costs and benefits of privatization are controversial even in the most economically liberalized developed countries, making the debate over privatization better suited to the national legislatures of OECD members than to the exclusive domain of international investment law. If those pushing hardest for privatization commitments in the MAI are successful, however, they will preempt such important domestic debates.
5. Monopolies (Chapter III. A-C)
Another issue generating significant controversy under the MAI is that of the treatment of monopolies. The article on monopolies specifically allows signatories to maintain, designate and eliminate monopolies. However, this right is granted without prejudice to the MAI’s Compensation for Expropriation rules. That means that if a nation designates a monopoly to the exclusion of other firms, it could be considered an act of nationalization (or tantamount to such an act), and the country would be required to monatarily compensate the losers under the Compensation for Expropriation rules.
Negotiators are having a difficult time with the analytic task of defining monopolies vis-a-vis state enterprises, concessions and government agencies. As well, they have failed to create a clear distinction between private and publicly held monopolies. In the April 1998 draft, it appears that negotiators have agreed that when a government designates a privately-held monopoly, it will have to do so consistent with National Treatment and MFN disciplines. Negotiators have not agreed on whether these should also be applied to the designation of public monopolies.
In addition, the U.S. has proposed language that could endanger the social policy of cross-subsidization. Cross-subsidization is used to ensure that the entire population has access to monopoly services like utilities. The cost of supplying power or telephone service to out-of-the-way rural areas is much higher than to urban areas. Cross-subsidization allows utilities to keep prices down so that rural inhabitants can have access. This practice prevents the ghettoization of certain pockets of the population by virtue of their geographical location.
The U.S.’ proposal would forbid monopolies to employ cross-subsidization (Chapter III Monopolies A3(c)) and requires that they act "solely in accordance with commercial considerations in its purchase or sale of the monopoly good or service" (Chapter III Monopolies A3[(d)]). Serious ambiguity exists in the article with the caveat that "differences in pricing between classes of customers. . . and cross-subsidization are not in themselves inconsistent with this provision; rather, they are subject to this subparagraph when they are used as instruments of anti-competitive behavior by the monopoly firm" (Chapter III. Monopolies A3[(d)]). As with many MAI provisions, a protection apparently granted in one clause is undermined by reference to another clause.
B. Absolute Investor Rights: Investor Protection Guarantees and
The MAI’s investment protection clauses (Chapter III. Performance Requirements and Chapter IV) effectively socialize the risks of investment by shifting certain liabilities to host governments and by extending a set of absolute rights to foreign investors. These rights go further in protecting foreign investors than the domestic law of most OECD members, and surpass protections given to the property of individual citizens of those countries.
It is these MAI provisions that would most significantly affect the laws and societies of developed countries, including the OECD countries negotiating the MAI. The MAI’s absolute rights for investors will also encourage increased capital mobility by making it safer, and more attractive, to continually shift capital between countries. American companies, for instance, would no longer have to rely on their Overseas Private Investment Corporation (OPIC) insurance, which employs environmental screening criteria when awarding coverage, when the risks of investment would be assumed by the host government. International investors who would normally accept the risks inherent in overseas investment as "part of doing business" and perhaps would accrue the cost of private-sector investment risk insurance, can now expect levels of state protection that far surpass those provided to domestic businesses. There are several specific mechanisms for investor protection proposed in the MAI text: Right to Compensation for Expropriation, General Treatment, limits on Performance Requirements, freedom of Financial Transfers, and Protection from Strife.
In the annex to the April 1998 MAI text, the Chairman of the OECD has proposed language for a provision entitled "Affirmation of the Right to Regulate." This proposal is intended to clarify that regulation per se will not be threatened by some of these MAI provisions. Unfortunately, this proposed language – which, until agreed by all negotiating countries has no legal status – is tautological in its language and fails to remedy the problems of the MAI’s ambitious, broad and ambiguous provisions (like de facto national treatment, performance requirements, expropriation, and general treatment). According to the proposal, "A contracting Party may adopt, maintain or enforce any measure that it considers appropriate to ensure that investment activity is undertaken in a manner sensitive to health, safety or environmental concerns, provided such measures are consistent with this agreement" (Annex 2 (Chairman’s Proposals): A package of proposals for text on environment and labor, 3) (emphasis added) 12. Obviously, the inclusion of the caveat at the end of the proposal eviscerates the ameliorative affects of the preceding language.
1. Mandatory Compensation for Expropriation (Chapter IV. 2)
This provision gives foreign investors a right to compensation when a government directly or indirectly "expropriates" their investments or profits or takes an action that has the "equivalent effect" of expropriation. The MAI text states: "A Contracting Party shall not expropriate or nationalize directly or indirectly an investment in its territory of an investor of another Contracting Party or take any measure or measures having equivalent effect except for a purpose which is in the public interest, on a non- discriminatory basis, in accordance with due process of law, and accompanied by payment of prompt, adequate and effective compensation. . . " (Chapter IV. 2.1) (emphasis added).
By referring to governmental actions that may have the "effect" of an "indirect expropriation," the MAI goes much further than banning the uncompensated seizure of real property, which is the property right embodied in the U.S. Constitution and in many other countries’ laws. The MAI’s broad definition of expropriation includes so-called "regulatory takings," imposing obligations on governments not to implement regulatory measures that may reduce the value of a investment. This definition could give investors standing to demand compensation for land-use, zoning and environmental conservation laws that set limits on the ways an investment can be exploited.
For instance, under NAFTA’s similar broad expropriation provision, the U.S.-based Metalclad Corporation is suing the government of Mexico on the grounds that the Mexican State of San Luis Potosi has, by declaring that a waste disposal facility acquired by Metalclad was part of a protected ecological zone, effectively expropriated its investment. Metalclad took over the facility, which had a history of contaminating local groundwater, with the obligation that it clean up preexisting contaminants. After an environmental impact assessment revealed that the site was on an ecologically sensitive underground alluvial stream, the Governor refused to allow Metalclad to reopen the facility. Metalclad claims that this action effectively expropriated its future expected profits and seeks $90 million in damages. Without the expropriation provision, Metalclad would have assumed the risks of its investment and learned a valuable lesson about conducting the proper environmental assessments before committing significant resources to an investment. Under the rights conferred by NAFTA – and the expanded version proposed in the MAI -- the Government of Mexico will be forced to shoulder the risks and costs of Metalclad’s investment should the company win its suit.
One basis for strong opposition in the U.S. to the MAI is that the Expropriation Clause in the MAI goes further than U.S. law (and further than the laws of most OECD member governments). In the U.S., not all expropriation is compensable. Regulation – as opposed to the outright seizure of private land – generally has not been considered takings under U.S. constitutional jurisprudence.
In addition, under U.S. Constitutional law, not all measures considered to be takings are compensable. Government may regulate investor conduct, even if it strips an investment of its economic viability, in the interest of public health, for example. Of major consequence to U.S. state, local and federal government, the MAI’s expropriation provision, as quoted above, does not distinguish between compensable and noncompensable takings; if a law were ruled expropriatory, governments would have to compensate investors regardless of whether the planned use of the investment would threaten the environment or public health and safety.
The MAI’s Expropriation Clause is an extreme form of domestic "takings" doctrine flipped on its head. Whereas U.S. law in this area upholds the rights of individuals, as opposed to investors, for land seized, it generally does not recognize as actionable the ways in which the economic viability of investment can be diminished through regulation. The MAI, on the other hand, would give investors rights in international law that individuals do not have. In the U.S., this MAI irony is planted in the rich soil of a recent national debate on "regulatory takings." Both the U.S. Congress and many state legislatures have decided that expansion of U.S. takings doctrine would unduly encroach on legitimate government regulatory capacity and would impose huge potential financial liability on governments.
In an annex to the April 1998 MAI text containing proposals for text on environmental and labor standards, the U.S. proposed replacing the current definition of expropriation with one that is somewhat weaker. It states, "A Contracting Party shall not expropriate or nationalise an investment in its territory of an investor of another Contracting Party or take any measure tantamount to expropriation or nationalization except:. . ." (Annex: Package of Proposals for Text on Environment and Labour, 5.2). This definition would remove the language concerning "indirect" expropriation, but, according to an accompanying interpretive note, would continue to cover "takings. . . even if title to the property is not taken," (this is also known as "creeping expropriation"). For a reference confirming that the MAI will cover "creeping expropriation," see MAI Commentary: Chapter IV. 2.5.
A proposed Interpretive Note 13 contained in the annex could more effectively protect national regulatory law. If adopted, it could give guidance to negotiators, policymakers and dispute bodies in terms of clarifying that the MAI will not set a new standard in international law for expropriation or general treatment. However, such an interpretation would be contrary to the intent of MAI framers as documented in numerous OECD documents. And as currently drafted, this proposed note (reproduced in fn.13) would not necessarily guarantee a safeguard for regulatory activities.
In addition, the definition of expropriation has not been settled in international law; some international legal instruments of the United Nations do not establish a right to compensation even for outright nationalization. Yet some dispute bodies, like the International Center for the Settlement of Investment Disputes (ICSID), have consistently ruled that even creeping expropriation short of nationalization is compensable.
Second, the NAFTA may have set a new international standard for expropriation as it relates to environmental and health and safety regulation per se. Even if MAI negotiators adjust the definition of expropriation to be contained within existing international law, case law established under NAFTA, such as with the pending Metalclad case, may control how expropriation would be defined under MAI obligations. To be effective, the proposed interpretive note would need language to the effect of: "regardless of any precedents to the contrary established in international law, expropriation and general treatment provisions under the MAI shall not establish a requirement that Parties pay compensation for losses which an investor or investment may incur through regulation, revenue raising and other normal activity in the public interest undertaken by governments."
2. General Treatment (Chapter IV. 1)
The General Treatment provision of the MAI instructs governments not to "impair by [unreasonable or discriminatory] [unreasonable and discriminatory] 14 measures the operation, maintenance, use, enjoyment or disposal of investments in its territory of investors of another Contracting Party (Chapter IV. 1.2). The extraordinarily wide range of investor actions covered by this provision – operation, maintenance, use, enjoyment, disposal – addresses all of the ways that governments regulate business.
This provision is intended to provide additional protection to investors when investments are subject to regulatory burdens that fall short of even the MAI’s broad definition of expropriation. For instance, multinational investors could use the General Treatment provision to challenge conditions on investment that are not enumerated in the closed list of restricted Performance Requirements, but which effectively leverage private capital for public benefit. These could include many key policies used by developed and developing countries alike, such as living wage laws covering a certain class of investors, laws mandating union neutrality in specific industries, requirements to remain in a state or municipality for a minimum period of time, laws requiring severance payments to dislocated workers and communities, and other existing or proposed policies to stem capital flight and create high quality jobs for local citizens.
The MAI does not refer to customary international law to elucidate the standard for determining what regulatory measures by governments might violate its General Treatment provision. In lieu of this clarification, the MAI’s General Treatment Clause sets a new international legal standard based on "reasonableness" or discrimination, without clarifying how arbitration panels would apply such standards in disputes over regulatory laws.
This lack of clarity could give investors grounds on which to challenge national, state and local laws, and give arbitration panels broad discretion in deciding what constitutes a "reasonable" burden for investors to shoulder in the public interest. The chilling effect of this clause on environmental, public health and worker safety regulation and enforcement could be substantial.
In the April 1998 Annex containing the "Package of Proposals for Text on Environment and Labor," negotiators have included a U.S. proposal on the General Treatment provision. The proposal is similar to that described above under expropriation. If adopted, it would state that the MAI does not set a new international standard for the general treatment of investors, but rather would rely on whatever standards currently exist under international law (Annex: Package of Proposals for Text on Environment and Labor, 5.1).
3. Removing Limits on Financial Transfers (Chapter IV. 4) and Financial Services Liberalization
The MAI’s "broad" coverage includes portfolio investment, such as stocks and bonds and trade in currency (MAI Commentary: Chapter II. 8). The MAI would prohibit a signatory from discriminating between foreign and domestic financial capital flows, the former of which are more likely to flee in response to currency fluctuations. The OECD’s attempt to further encourage global capital mobility through the MAI’s Financial Transfer provisions comes at a time when even the World Bank acknowledges that nations have good reason to regulate both incoming and outgoing capital flows 15. The very capital flow regulations mainstream economists and institutions like the World Bank are calling for inherently make distinctions between domestic and foreign investment capital.
Currently, over 90% of all currency trading — with a daily flow of $1.3 trillion — is speculative. This means that in the overwhelming majority of cases in which a foreign investor purchases the currency of another country, it is not to build factories, import goods, buy government bonds or purchase shares of an enterprise. Rather, these purchases are for the purpose of profiting from (or hedging against) fluctuations in the value of a currency.
With the MAI, the OECD would depart from its traditional policies on capital flows. The OECD’s Codes of Liberalization allow OECD members to unilaterally impose capital controls when they think it is necessary 16. The MAI denies signatories, who would include non-OECD members, this capacity.
Specifically, draft MAI provisions would prevent countries from adopting and implementing the following strategies to prevent capital flight:
imposing limits on currency convertibility. During a financial panic, a government may wish to avert full-blown capital flight by requiring licenses for currency exchange (Chapter IV, 4.2) and
imposing "speed bumps" to encourage long-term investments. Chile is the best known example of a nation that requires a minimum time commitment on the part of foreign investors (Chapter IV, 4.1).
In addition, the following strategies to limit inflows of foreign investment could be prohibited:
imposing a ceiling on foreign borrowing by domestic banks (Chapter III. National Treatment 1);
imposing a reserve requirement for portfolio investment. To discourage short-term investment, some countries require that foreign investors make an nonrefundable deposit in their central bank equal to the amount of their investment in the stock market (Chapter III. National Treatment 1; Chapter III. Performance Requirements 1);
withholding government-subsidized insurance for the bank deposits of foreign investors (Chapter III. National Treatment 1);
requiring administrative permission for a foreign bond issue and imposing minimum maturity periods for foreign bond issues (Chapter III. National Treatment 1); and
imposing a less favorable exchange rate on the capital transactions of foreign investors (Chapter III. National Treatment 1).
Given the recent financial crises in Asia, one may question the prudence of these rules applying to all circumstances. MAI negotiators have proposed a narrowly drawn suspension of MAI obligations in the event of a balance of payments crisis. But, unlike in the OECD’s Codes of Liberalization, it is not left to the ailing nation to decide when it is in crisis; MAI drafters have included a provision in the agreement that leaves this judgment up to the International Monetary Fund (Chapter IV. Temporary Safeguard 2). Historically, the IMF has tended to oppose departures from "normal" (that is, as unrestricted as possible) trade and capital flows, even in crisis situations. It seems, therefore, that this narrow exception would rarely, if ever, be exercised, given the MAI’s grant of a veto over its use by the IMF.
4. Performance Requirements
Performance requirements, or conditions on investment, are used by governments to achieve economic development objectives. Developing countries often require performance requirements such as the mandatory export of the products of foreign investors to protect domestic markets from foreign competition, or conditions on hard currency movements for balance of payments purposes or for other reasons of industrial policy. Also common are rules mandating that foreign investors use domestic suppliers or inputs.
In developed countries, performance requirements are closely linked with politically sensitive objectives like job creation in poor areas, community reinvestment to counter racial discrimination in bank lending, and environmental protection. The MAI does not make a distinction between performance requirements that are designed to extract concessions from foreign investors and performance requirements used to promote economic development objectives or to address particular economic, social or environmental problems. The MAI’s general restriction on performance requirements applies to strategies undertaken by developed and developing nations alike.
The rules apply to governments’ treatment of domestic investors and investment as well as of foreign investors (Chapter III Performance Requirements 1). The text states: "A Contracting Party shall not, in connection with the establishment, acquisition, expansion, management, operation, maintenance, use, enjoyment, sale or other disposition of an investment in its territory of an investor of a Contracting Party or of a non-Contracting Party, impose, enforce or maintain any of the following requirements, or enforce any commitment or undertaking:" (emphasis added). Note the use of the term "a" Contracting Party and contrast with the National Treatment provision, which applies to investors of "another" Contracting Party, that is, foreign investors. This means that restrictions on performance requirements imposed by governments are extended to domestic firms, as well as foreign 17.
At the launch of MAI negotiations, the OECD announced that the MAI would restrict more performance requirements than were restricted by NAFTA. MAI framers proposed that the agreement should ban voluntary performance requirements to ensure that those investors willing to submit to certain requirements would not be treated more favorably by governments than those investors who were not. They reasoned that the best way to ensure that performance requirements were not used to distort the allocation of investment would be to ban some of them outright, even if governments were willing to "pay" for their use through subsidies. The MAI framers also reasoned that unless the MAI forbade governments from imposing performance requirements on domestic investors, governments would favor domestic investors, upon whom they could impose requirements, over foreign investors, upon whom they could not.
The April 1998 draft of the MAI reflects that these ambitions have not been trimmed back: The MAI bans a greater range of performance requirements than does NAFTA; it prohibits some voluntary performance requirements (Chapter III. Performance Requirements 2) and, as noted above, applies to government treatment of domestic investors and investment as well as foreign investors and investments.
Under the MAI text, the following performance requirements are banned for domestic and foreign investors, even if an investor would satisfy them voluntarily in exchange for "an advantage" (meaning a subsidy or other incentive):
domestic content requirements (Chapter III. Performance Requirements 1(b));
domestic purchasing requirements (Chapter III. Performance Requirements 1(c));
balancing of imports and exports (Chapter III. Performance Requirements 1(d));
local sales restrictions (Chapter III. Performance Requirements 1(e); and
mandatory exporting requirements (Chapter III. Performance Requirements 1(a)).
An additional group of performance requirements could not be imposed on foreign or domestic investors unless accompanied by an "advantage":
research and development requirements (Chapter III. Performance Requirements 1(i));
requirements that investors hire a certain number of citizens (Chapter III. Performance Requirements 1.(j));
mandatory joint ventures with domestic participation (Chapter III. Performance Requirements 1(k));
mandatory domestic equity participation (Chapter III. Performance Requirements 1(l));
technology transfer requirements (Chapter III. Performance Requirements 1(f));
requirements to locate headquarters in the territory (Chapter III Performance Requirements 1(g)); and
requirements that an investor supply goods or services exclusively from the territory (Chapter III. Performance Requirements 1(h)).
In addition, the MAI will not likely contain the partial environmental exception in the performance requirements section that appears in the NAFTA. This NAFTA environmental carve-out allows governments to impose domestic content or purchasing requirements if they are necessary to ensure compliance with environmental or health and safety laws. According to a footnote in the MAI, there is very little support for such a partial carve-out among OECD members (Chapter III. Performance Requirements fn. 30).
A "program" for domestic economic development emerges from the MAI’s prohibitions on performance requirements. The principles of this program are that governments shall not regulate business to achieve economic development objectives, but in some cases governments may pay investors to achieve such objectives.
Likewise, in the April 1998 MAI draft, a footnote has been inserted into sub-paragraph (j) of the Performance Requirements section (which restricts employment requirements). It states, "Nothing in this paragraph shall be construed as interfering with programmes targeted at disadvantaged regions/persons or other equally legitimate employment policy programmes. […]" (Chapter III. Performance Requirements fn. 24 to 1(j)) (emphasis added). This footnote does not exempt all, or even most programs targeted at disadvantaged regions or persons – only those that mandate specific job creation goals. In other words, there are eleven other restrictions on performance requirements in the MAI’s Performance Requirements section which could be construed as interfering with programmes targeted at disadvantaged regions or persons. To support a government’s ability to create policies to promote disadvantaged areas, the MAI text must exempt such programs from the entire performance requirements section, and, indeed, the entire agreement.
5. Protection from Strife (Chapter IV.3)
The MAI’s investment protection provisions require MAI-member countries to provide protection for foreign investment during periods of strife, broadly defined to include wars, revolutions, civil insurrection and "disturbances" and other "states of emergency" (IV. 3. 3.1). As written, the MAI’s definition of strife is broad enough to capture such diverse events as riots caused by food or fuel shortages, strikes (which may or may not be illegal given a country’s labor laws), and social chaos resulting from natural disasters.
The MAI requires that governments give foreign investors the more favorable of National Treatment and MFN treatment for the protection of foreign investment during episodes of civil strife broadly defined (VI. 3.3.1). However, the MAI also guarantees restitution or compensation for foreign investors -- even if not provided to domestic investors -- in instances where a government "requisitions" all or part of an investment or unnecessarily destroys all or part of an investment during episodes of strife (IV.3.3.2(a) and (b)).
A foreign investor bereaved by the loss or damage of an investment in the course of a riot, war or other conflict could ask MAI dispute tribunals to determine whether or not the destruction of its property was "necessary," and award compensation based on that judgment. Domestic businesses damaged or destroyed by government forces, on the other hand, would not have such recourse under the MAI. This provision empowers MAI dispute panels, which will be composed by investment law experts -- to judge the validity of a government’s tactical decision-making during periods of armed conflict, invasion or insurrection.
II. Enforcement of MAI Provisions
1. Investor-State Dispute Settlement (Chapter V. D)
Much of the debate around the MAI’s potential impact focuses on the enforcement of its substantial provisions through "Investor-State" Dispute Resolution. This rule gives investors (corporations or individuals) the right to directly take governments to a variety of international tribunals to sue for damages if they feel that their rights under the agreement have been violated (Chapter V. D1-2).
Indeed, investors decide when, where and whether to challenge laws or policies as violations of the MAI (Chapter V. D2.; V. D3(a)). There is no governmental mechanism in place to screen investor claims. Despite repeated statements by some governments’ negotiators that such expansive powers could be limited, the April 1998 text fails to contain any such limits.
In critical areas the MAI does not set out any standards to be employed by dispute panelists when adjudicating a case. Thus, ambiguity is built into the agreement, leaving everyone from NGOs to the negotiators themselves to speculate as to the MAI’s potential impacts, thus effectively severing the legislative intent of the MAI from the enforcement process 18.
In signing the MAI, all countries give their unconditional consent to submit to dispute resolution should an investor file a claim (Chapter V. D3(a)).
The MAI lists three venues at which investors can choose to file a claim against a government. The first, ICSID, is part of the World Bank. Nations must be a member of the ICSID Convention to use the facility (V. D. 2.(c)(i)(ii)).
If an MAI signatory nation is not an ICSID member, an investor could opt to use either the UNCITRAL (United National Center for International Trade Law) (V. D. 2.(c)(iii)) or the arbitration facility of the ICC (International Chamber of Commerce) (Chapter V. D2(c)(iv)).
There are significant conflict-of-interest issues that arise with some of these designated investment arbitration institutions. For instance, the International Chamber of Commerce is hardly a neutral player in the MAI debate, but rather is a leading proponent of major investment deregulation. The ICC lobbied hard for an official role in the MAI and competes with other international trade adjudication bodies for business. The fact that money and prestige are at stake for dispute bodies builds in an incentive for panels to come out with rulings favorable towards investors.
The Clinton Administration recognizes that much of the criticism of the MAI involves the investor-state dispute mechanism. To defuse citizens’ concerns, it has argued that the investor-state dispute mechanism already exists in the some 1600 Bilateral Investment Treaties (BITs) now in existence, and points out that investors have not used it to challenge U.S. laws or to avoid compliance with environmental or labor regulations. There are, however, several reasons to question the value of the past BITs for predicting the regulatory impact of the investor-state dispute mechanism when used to enforce MAI provisions.
BITs have been signed in order to enhance developed countries’ access to heavily regulated markets of the newly independent states (e.g., ex-Soviet states) and to minimize the risks inherent in investing in countries with less stable political and legal institutions. Because these relatively poor nations who are BIT partners are not home to multinational corporations -- potential plaintiffs -- with a market presence in the developed world, it is unlikely that BITs would have been used to contest U.S. or other developed country policies. Most members of the OECD, and thus original MAI signatories, are significant exporters of foreign investment. This means that, unlike U.S. BIT partners such as Haiti, Uzbekistan, and Kyrghistan, for instance, MAI signatories are home to capital-rich multinational investors with the power to leverage the dispute process to their advantage. And unlike its BIT partners, most, if not all, OECD members have investments in the U.S. (and vice versa).
In addition, in contrast to the U.S. BIT partners, the markets of OECD-members are relatively open and foreign investment is largely protected under domestic law. In these liberalized investment climates, most perceived barriers to investment are regulatory (such as environmental conservation and zoning laws, public safety laws banning dangerous products, economic sanctions for investors who do business with dictatorial governments, etc.). Thus, it follows that under the MAI, the Investor-State Dispute Mechanism would more often be exercised to challenge regulatory regimes perceived by investors as onerous barriers to investment 19.
The MAI’s Investor-State Dispute Mechanism is potentially more threatening to domestic regulatory policies than that established in the NAFTA Investment Chapter (chapter 11). First, NAFTA’s investor-state mechanism applies only to limited NAFTA provisions. Second, once an investor initiates a dispute under NAFTA, it must waive its right to pursue monetary damages in other judicial venues. This rule prevents investors from "forum shopping" or initiating lawsuits in any number of courts — international or domestic — to increase their chances of a favorable ruling. In the MAI provisions on investor-state dispute resolution, this safeguard is merely optional for governments who wish to exercise it (Chapter V. D3(b)).
In general, the MAI’s substantive provisions are broad, vague and unspecific. Framers have provided little explanatory guidance in those areas — like general treatment, expropriation, de facto discrimination — where the agreement sets new standards for international law. When combined with the lack of clarity of MAI provisions, the Investor-State Dispute Mechanism guarantees a great deal of uncertainty as to the MAI’s implications for domestic lawmaking.
Following the April 1998 OECD Ministerial, there were vague reports that negotiators would act to ensure that the effective transfer of state power to corporations by the MAI’s investor-state dispute provisions would be limited. There were rumors that MAI negotiators were exploring "screening" mechanisms to minimize the number of claims and the related costs to governments of defending lawsuits. These mechanisms apparently included the possible establishment of an appellate process that lies outside the MAI’s arbitration fora, or a governmental pre-screening mechanism to filter out "frivolous" corporate or private investor suits.
In the April 1998 MAI text, a draft article appears buried in the annex section 20 entitled "Advisory Opinion: Suggestion for MAI Dispute Settlement or Institutional Matter Experts." It states that the Parties Group (signatory governments of the MAI) may set up a legal advisory body on "the interpretation and application of the Agreement." This terse and vaguely worded "advisory opinion" provides no assurance that any limits will be set in advance to screen suits nor that any opinions issued by the body would have any role in an investment dispute that has been brought to arbitration 21.
While MAI negotiators have not developed screening processes for the agreement’s investor-state dispute resolution mechanism, negotiators have drafted provisions for the enforcement of arbitral rulings against governments. Under the MAI’s "Written Agreement of the Parties" provision (V.D5), nations who sign the MAI agree to confer domestic standing to rulings and thus agree to domestic enforcement of arbitral awards set down by MAI tribunals.
This MAI provision requires that MAI signatories consent to Article II of the New York Convention, which requires domestic standing in domestic courts for the enforcement of the rulings of MAI investment law panels. The MAI thus closes a loophole present in both NAFTA and GATT, neither of which forces domestic courts to bind a government to rulings or monetary awards set down by international trade or investment tribunals.
2. State-to-State Dispute Settlement (Chapter V. A-C)
Under the MAI, member-nations may seek enforcement of the obligations of other signatories under the agreement. Thus, like investors, countries may challenge the measures, policies or laws of each other before international tribunals. A party can request damages on behalf of an investor; indeed, the MAI does not stipulate that for any case initiated on behalf of an investor, the investor must be a citizen of the plaintiff nation. Further, unlike in investor-state dispute resolution, which involves compensation and restitution-in kind, an arbitral panel may recommend that "a Party bring its actions into conformity with its obligations under the Agreement" (V.C6(c)(ii)). That is to say, a state-to-state MAI tribunal can call for a country to change its law to conform with MAI rules.
However, the MAI text does not provide the same mechanisms to ensure enforcement of a ruling under its state-to-state dispute resolution rules as it grants to private investors or corporations under the investor-state rules. As of the April 1998 text, there are two bracketed options for what a "victorious" country can do if a "losing" country fails to comply with the ruling of a state-state MAI dispute panel. The two options – to "take measure in response" or suspend MAI obligation to that party – are to be exercised "proportionately" to the damage the MAI violation causes (Chapter V(c)(9)(a)). As well, the MAI Parties Group (the MAI member governments) may suspend the non-complying country’s participation in that group (Chapter V(C)(9)(c)(ii)). These options contrast weakly with the investor-state system’s allowance of compliance proceedings in domestic courts through the New York Convention rules. Indeed, as a general matter, the design of the MAI dispute resolution system promotes the use of the private investor to state mechanism.
III. The MAI’s Mechanisms for Continued Investment Liberalization
1. The Effective 20-year Lock-In (Chapter XII. 1 And 3)
MAI framers have long expected the agreement to contain a built-in mechanism that would continue to "ratchet up investment liberalization." Countries who sign on to the MAI must make a five year commitment to membership. After five years, countries may give notice of withdrawal. However, they are bound to honor all MAI obligations towards existing investments for another 15 years (Chapter XII, 3). This requirement that countries commit to 20 years of compliance is unique among international agreements. NAFTA, for instance, allows countries to withdraw free from all obligations at any time after six months written notice.
2. Roll-back (Chapter IX. A(b); MAI Commentary: Chapter IX. Rollback)
In addition to the 20-year lock-in, OECD framers of the MAI intend to set into motion among signatories a schedule of liberalization – termed "rollback" in English and "dismantlement" in French – for remaining barriers to foreign investment, starting with country-specific reservations (MAI Commentary: Chapter IX. Rollback 1-2)). There have been reports that OECD members are already setting the groundwork for liberalization negotiations to take (MAI Commentary: Chapter IX Rollback 4(c)) 22. In addition, OECD members have also discussed the possibility of including a provision in the MAI that would mandate periodic reviews of country-specific reservations (MAI Commentary: Chapter IX. Rollback 4(b)). This built-in liberalization would essentially undermine the reservation process, which traditionally has been used as a mechanism for protecting and exempting certain laws. Laws for which reservations have been taken would not be saved, but rather their removal would only have been delayed.
3. Standstill (Chapter IX. A; MAI Commentary: Chapter IX. Standstill)
The MAI’s stand-still provision would require countries who claim a reservation for certain laws or policies to abstain from strengthening or promulgating similar laws or policies after the agreement is signed (Chapter IX. A(b); (MAI Commentary: Chapter IX. Standstill 3(c)(d)). In practical terms, standstill would prevent a government from adopting new measures that limit ownership of agricultural land to state residents, for example. The MAI might allow countries to lodge open-ended reservations in a few narrowly-defined policy areas (Chapter IX. [B]). Open-ended reservations allow a country to continue to promulgate rules that violate the MAI in certain narrowly defined policy areas. Under NAFTA, countries could lodge open-ended reservations, and the U.S. requested that nuclear policy and aviation policy be exempted from NAFTA rules indefinitely. Yet, even if adopted by the MAI, there is no indication that open-ended reservations will not also be subject to elimination in future rounds of trade talks.
In a disturbing annex to the April 1998 text, one delegation proposes a process by which countries must compensate other countries for non-conforming measures claimed as reservations. This delegation argues that the various approaches proposed for protecting laws – exceptions, closed reservations, open-ended reservations and provisions on special topics like demonopolization and privatization – "complicate the assessment of and/or may lead to future distortions in the overall balance of commitments among Contracting Parties, and, more generally, tend to favor "bad" guys having lodged such reservations and/or willing to introduce new non-conforming measures, thereby considerably deteriorating the legal quality of the agreement. . ." (Annex: Maintaining the Overall Level of Liberalization, Introduction, 3). The country taking a non-conforming measure under the reservations, and possibly under general exceptions, would have to "ensure that the overall level of liberalization is maintained, if necessary through compensatory adjustments (Annex: Article XX Maintaining the Overall Level of Liberalization, 1-2) (emphasis added).
Under this proposed article, a MAI signatory could request that an arbitral tribunal scrutinize another country’s reservation or exception and decide whether "compensatory adjustments" are necessary, and if so, just how much is "adequate and sufficient." Thus, if this proposal were adopted under the MAI, governments would be literally forced to pay for their sovereign right to protect certain areas from foreign competition and certain laws from foreign challenge.
4. Exceptions to the MAI (Chapter VI. General Exceptions)
Exceptions are binding provisions on all signatories built into the core text of an agreement that list the circumstances when a country may violate a term of an agreement without penalty. Exceptions only come into play as a defense when a country’s law or policy has been challenged in dispute resolution as a violation of an agreement. For instance, GATT Article XX lists the exceptions to that agreement, allowing countries to take some otherwise GATT-illegal actions necessary to protect human, animal or plant health or life or in relation to preservation of a national treasure or public order or morals.
As compared with previous international economic agreements, the MAI’s list of built-in exceptions is substantially pared-down. The MAI presently contains an exception for actions taken in pursuance of its "obligations under the United Nations Charter for the maintenance of international peace and security," actions it considers "necessary for the protection of its essential security interests" and a conditional exception from obligations for measures taken to preserve "public order" (Chapter VI. General Exceptions 2 and 3). GATT, on the other hand, contains exceptions for measures necessary to protect public morals, human and animal health, national treasures, exhaustible natural resources, national security, public order and more.
The E.U. has proposed to insert into the MAI the GATT Chapter XX exceptions for laws that are "necessary to protect human, animal or plant life or health" or "relate to the conservation of exhaustible natural resources" (Chapter III, Proposed "Additional Clause" on Labour and Environment, fn. 129). A confidential note by the OECD Chairman indicates that this exception has a good chance of being adopted into the MAI.
Yet under the GATT, these very narrow exceptions have failed to protect popular environmental laws 23. The most recent example of trade overriding environmental laws despite the GATT’s exceptions clauses is the April 1998 WTO ruling on the Malaysian, Indian, Pakistani and Thai challenge to the ban on the U.S. sale of shrimp harvested without the use of turtle excluder devices (TEDs). Whatever one’s opinion of the U.S. law in question or the overall outcome of the case, language in the ruling on the GATT Article XX exceptions is troubling. The WTO report concluded that the U.S. ban, which required shrimp-fishing nations to mandate the use of TEDs among producers, was not safeguarded by the GATT exceptions because it "undermined the multilateral trading system." 24 The panel called for an extremely narrow reading of Article XX, reasoning that the exceptions could not apply if a law’s intent was to limit free trade. The WTO panel ruled that a nation’s regulations, including environmental measures, must conform with the principles of free trade even if laws – such as the U.S. import ban on certain shrimp – are non-discriminatory and taken as part of a multilateral effort to conserve and protect natural resources and plant and animal life 25. The panel rejected application of the exception even though the shrimp embargo conforms with multilateral environmental agreements such as the CITES (Convention on International Trade in Endangered Species of Wild Fauna and Flora). The CITES allows the imposition of trade sanctions on nations who endanger species threatened with extinction. This recent WTO ruling bears directly on the MAI because it is precisely the same GATT exception language that is being proposed for inclusion in the MAI by the European Commission. For a more detailed analysis of the GATT Article XX exception, see Part Two below.
Finally, a provision limiting the use of exceptions under the MAI invites challenges under dispute panels and guarantees that the use of exceptions will be highly scrutinized. Under the MAI, exceptions cannot be taken "solely for economic reasons" and must be "in proportion to the interest being protected" (Chapter VI. General Exceptions 5). Remarkably, a consultation process has been set up for when one MAI signatory believes that another signatory has claimed reservations out of proportion to the latter country’s problem. This opens a pandora’s box wherein one country can second-guess the discretion of another country in formulating rules around such essential security issues as nuclear policy, for example.
5. Accession (Chapter XII)
The MAI is open to accession by any non-OECD member country, and OECD architects of the MAI are encouraging such accession. Four non-member countries have been observing the negotiations, and seven have announced that they would like to join the MAI as charter members. 26
For those countries who do not accede as charter members, MAI negotiators have proposed new language to send a "strong political message" that participation by developing countries is "welcome" (Chapter XII. Accession, fn. 4). This proposal would allow the Parties Group (members of the MAI) to take into consideration "particular circumstances of each applicant, including the possible need for country specific exceptions to accommodate the applicant’s development interests. . . [and] will consider requests for such exceptions in the context of the applicant’s overall reform of its domestic investment regime" (Chapter XII. Accession, fn. 4). This proposal responds to criticism that the MAI does not take into account the needs and interests of developing nations. It is unclear whether such exceptions could apply to substantive MAI provisions like performance requirements or national treatment obligations, or would only include country-specific laws.
On the other hand, negotiators have not proposed that other criteria, such as the human rights and labor rights records of non-members, be taken into account before a country can accede to the MAI.
The February and April 1998 draft MAI texts contain a flurry of new proposals addressing the treatment of environmental and health and safety laws under the agreement. Some of the language appears in brackets. This means that MAI working groups have drafted text, but negotiators haven’t reached a consensus on whether it should ultimately be adopted in the MAI. Other provisions are proposals, most often submitted by a single delegation, that have not – and may not ever – be worked into even the draft MAI text. In other words, none of these proposals has unanimous support, and many have but the slimmest chance of actually ending up in the MAI.
The proposals reflect the OECD’s new strategy – exemplified by President Clinton’s recent WTO speech and the OECD’s trade and investment book publicity tour – of promoting investment and trade agreements by "selling globalization" to the public.27 One can not look at the list of recent proposals on the environment and conclude that MAI negotiators have finally introduced clear and coherent protections for environmental labor, or other public interest policies. Nor can one conclude that negotiators intend to address in a serious and systematic fashion the environmental, health, development and other problems that typically result from investment liberalization. Rather, negotiators have put forward a smorgasbord of proposals, many of which make little progress in determining how the MAI’s approach to democratic lawmaking powers and environmental, labor and other public interest policy should be interpreted by legal experts and dispute resolution panels.
The latest proposals present conflicting approaches to environmental, health and labor matters as related to the MAI. Some of the proposals aim to provide protections to environmental laws and increase the leeway of legislators to promulgate environmental and health and safety laws in the future. Others contain hortatory language to encourage governments not to lower environmental standards to attract investment. But others seek to limit, through new restrictions on environmental lawmaking, the actions that governments can take ensure that domestic investors don’t use the MAI to relocate to other countries in pursuit of weaker environmental regulations.
In addition, the proposals for "pro-environmental" provisions in the MAI are so heavily qualified that they obfuscate, rather than clarify, whether environmental policies are actually protected: The proposals for exemptions for environmental laws are subject to significant restrictions. Some of the proposals are tautological (e.g., an environmental law is legitimate as long as it does not violate any MAI provisions) and therefore add nothing substantive to the agreement. Proposals encouraging governments to pursue high standard environmental policies are still strictly hortatory and do not set concrete goals for identifying and addressing environmental degradation related to investment liberalization.
Finally, long-standing criticisms of the MAI’s treatment of environmental concerns have yet to be addressed: (1) the MAI imposes no binding responsibilities on investors; (2) all environmental protections are challengeable under investor-state dispute resolution; and (3) some problematic provisions in the MAI, like expropriation and general treatment, have not been amended to ensure that they are not used by foreign investors to attack legitimate environmental and health and safety regulations on the grounds that these strip an investment of economic viability or impose "unreasonable" limitations on investor conduct in relation to their investments. (The U.S. has proposed alternative language for the expropriation and general treatment provisions, which has been critiqued on p. . In his proposal on labor and environmental standards, the OECD Chairman indicates his support of the U.S.’ proposed changes.) 28
For conceptual clarity, these proposals are divided into two categories: exceptions for environmental and health and safety laws and recommendations for governments regarding environmental and labor standards.
A. Proposed Exceptions
1. Environmental exception for two performance requirements:
Language: "[Provided that such measures are not applied in an arbitrary or unjustifiable manner, or do not constitute a disguised restriction on investment, nothing in paragraphs 1(b) [domestic content] and 1(c) [domestic purchasing] shall be construed to prevent any Contracting Party from adopting or maintaining measures, including environmental measures: (a) necessary to secure compliance with laws and regulations that are not inconsistent with the provisions of this Agreement; (b) necessary to protect human, animal or plant life or health; (c) necessary for the conservation of living or non-living exhaustible natural resources]" (Chapter III. Performance Requirements 4).
Explanation: Notwithstanding international environmental agreements, there generally are not uniform environmental laws or policies within or between countries. U.S. states, for instance, have varying environmental needs and objectives, and impose different requirements on industry. Due to its smog problem, California imposes more stringent emission requirements than do other states. And some governments have developed in general a more proactive and aggressive environmental policy for resource conservation, such as Scandinavian laws on tropical timber. As expected, local industries have sprung up around environmental regulation compliance. Foreign investors may find themselves having to purchase pollution control equipment locally to satisfy these special local environmental requirements. Likewise, in states with proactive resource conservation laws – such as mandatory recycled content in certain products – foreign investors could find themselves investing in local recycling technologies to comply with the law. An exception for domestic purchasing requirements would protect governments from challenge by foreign investors who argue that because such requirements force them to purchase locally when they would normally import materials or equipment from parent companies or other affiliates, such environmental regulations violate the MAI.
Analysis: Although apparently drafted to assure governments that they are free to pursue environmental policy objectives and can take steps to ensure that all investors comply with existing laws, the legal language of the actual proposal is very limiting. This provision, reproduced from NAFTA, requires that measures taken by governments be "necessary" both to protect human, animal and plant health and to conserve resources. (This is a more restrictive adaptation of GATT Article XX language.)
What standard will be employed to determine whether a law is "necessary" to achieve an environmental or health and safety objective? The MAI does not provide any guidance in this regard. Under the GATT, similar language has been interpreted to impose requirements that a government’s environmental and health and safety laws pass a "least trade restrictive test." A country must prove the negative: that no less trade restrictive means for obtaining an objective could exist. (In addition, the legitimacy of the objective, not only the means used to obtain it, must separately stand up to a legal test.) Without clarification, no one – including negotiators and arbitrators – can be sure whether the MAI would force a government to ensure that a regulations is no more investment restrictive than necessary to fulfill the objective.
Should the "necessary" language be adopted to the MAI without clarificatory standards, arbitration panels would be given broad discretion to decide for themselves whether laws requiring, say, a certain amount of recycled content in products pass the test of being "necessary" or the least investment restrictive mechanism to achieve resource conservation.
Also, the terms "arbitrary," "unjustified" and "disguised" appearing in the proposed exception to the two performance requirements have been randomly defined to rule against environmental regulations in GATT cases. Unfortunately, there is no alternative definition of these terms in competing international case law.
In addition, this partial exception only applies to two of twelve performance requirements: domestic purchasing and content requirements. It would not allow a government to impose technology transfer requirements on foreign companies as a way to achieve international environmental policy goals, as instructed in the Climate Change Convention (CCC), for example. To more effectively reduce harmful emissions, the CCC advises multinational investors to share "green" technology with poorer host nations.
Status: This language has been in brackets since the January 1997 draft of the MAI. A footnote to the clause indicates that the majority of delegations support its deletion on the grounds that it is too broad (that is, it gives governments too much leeway to impose performance requirements). However, this clause appears again in the April 1998 text annexes on additional environmental and labor provisions.
2. GATT Article XX General Environmental Exception:
Language: "Subject to the requirement that such measures are not applied in a manner which could constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on investment, nothing in this agreement shall be construed to prevent the adoption, maintaining or enforcement by any Contracting party of measures: (a) necessary to protect human, animal or plant life and health (b) relating to the conservation of living or non-living exhaustible natural resources" (Chapter III. Additional Clause on Labour and Environment, fn. 129).
Analysis: This language covers more than just the two narrow performance requirements of domestic purchasing and content described above. Again, however, the specific language of the proposal is limiting and relates to GATT jurisprudence that has recently been further weakened. Measures cannot be "applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on investment." This language has proved to be a lightening rod for tribunal’s pro-liberalization discretion in its use in the Chapeau language of GATT article XX. Because this language gives investors explicit grounds on which to challenge environmental or health and safety laws, this proposal is more accurately described as a quasi-exception.
A true exception, like the MAI’s exception for "essential security" interests, imposes no such requirements on government actions. It simply states that "Nothing in this Agreement shall be construed to prevent any Contracting Party from taking any action which it considers necessary for the protection of its essential security interests. . .".
As well, this proposal uses the GATT language of "necessary to protect human, animal or plant life and health." As described in the context of the partial exception for performance requirements, the term "necessary" grants investors significant grounds on which to challenge environmental regulations in international court. Regardless of the standard employed, the MAI’s adoption of the "necessary" language could expose a government’s entire environmental policy to second-guessing by unaccountable international commercial tribunals. Dispute resolution panels would be empowered to scrutinize a government’s approach to environmental protection and conservation any time an investor claimed that an environmental law or public health regulation put it at a competitive disadvantage vis-a-vis local investors.
In proposing use of the GATT Article XX language, the European Commission would reinforce the distinction between resource conservation and health and safety laws. Under GATT Article XX, a law does not need to be "necessary" to achieve the goal of resource conservation, it just has to "relate to" the objective of environmental conservation. (See clause (b) above.) This would presumably give governments more freedom to propagate and enforce restrictions on the exploitation of mineral resources or to enact recycling laws. However, several GATT and WTO cases have not given this difference much distinction, instead relying on Article XX Chapeau language described above to rule against countries that claimed this exception to preserve environmental laws.
Status: Predictions vary from a high probability of including the exception in the MAI to no chance.
3. Norway’s article on the granting of authorizations for the prospection, exploitation and products of minerals, including hydrocarbons.
Language: [(2) "Consistent with the present Agreement, the Contracting Parties may establish: (a) procedures to be followed for the granting of authorisations according to which all interested investors may submit applications pursuant to this article; (b) criteria on the basis of which authorisations are granted; (c) conditions and requirements, including requirement of state participation, concerning the exercise or termination of the activities of prospecting, exploring for and producing minerals, including hydrocarbons, whether contained in the authorisation or to be accepted prior to the grant of an authorisation.
(3) The Contracting Parties shall apply such procedures, criteria, conditions and requirements as referred to in paragraph (2) above in transparent and objective manner and in a way which ensures that there is no discrimination on grounds of nationality between investors as regards access to an exercise of the activities of prospecting, exploring for and producing minerals, including hydrocarbons] (Chapter III. Article on the Granting of Authorisations).
Analysis: This language is a scaled down version of Norway’s earlier submission that mineral resources be entirely excluded from the definition of "investment." Rather than exempt natural resources, this proposal allows governments to contradict MAI rules and set the terms for exploitation and to limit investor rights of establishment. The proposal would enable governments to maintain joint ventures with investors to maintain state control for taxation and regulatory purposes. It prevents governments, however, from discriminating between foreign and domestic investors (national treatment) and among foreign investors (MFN treatment) when granting authorizations to exploit resources. Because a nation’s natural resource base can often comprise its comparative advantage vis-a-vis other nations, National Treatment and MFN obligations towards foreign investors in this instance, as is the case with all strategic industries, will of course be more controversial. Such MFN and National Treatment requirements could be particularly damaging to developing countries whose control over mineral wealth is often a key engine for development resources.
Status: This proposal has been placed in brackets, indicating that working groups have addressed it, but agreement hasn’t been reached as to its content and wording.
4. "Package of Additional Proposals" tabled by the U.S.
a. Language: This paragraph would be inserted into an interpretive note for the bracketed language [in like circumstances], which the U.S. has proposed for insertion into the National Treatment and MFN treatment provisions since the beginning of MAI negotiations.29 This proposal would narrow the definitions of National Treatment and MFN treatment provisions. "Similarly, governments may have legitimate policy reasons to accord differential treatment as between domestic and foreign investors and their investments in certain circumstances, for example where needed to secure compliance with domestic laws that are not inconsistent with national treatment and most favored nation treatment. Moreover, the fact that a measure applied by a government has a different effect on an investment or investor of another Party would not in itself render the measure inconsistent with national treatment and most favored nation treatment" (Annex: Package of Proposals for Text on Environment and Labour, interpretive note to 2.3).
Analysis: The original U.S. proposal to add "in like circumstances" language deals with comparing types of investments for the purposes of national and most favored nation treatment. The principle is that, for instance, a foreign bank should be treated the same as a domestic bank, but not the same as a domestic manufacturer. The proposed addition speaks not to categories of investors, investment and laws, but to the intent behind laws. This provision is aimed at clarifying that if a law has a different effect on foreign investors, it is not necessarily a violation of National Treatment or MFN treatment. If language were adopted that clearly imposed this principle, it could preserve some governmental ability to regulate business: It would narrow the reach of National Treatment and MFN treatment for all laws – including those in the areas of environmental, health and safety and economic development policy. Such a change might protect some environmental and health and safety laws that ban the products of foreign investors alone (because they are the sole producers of such products). It is unclear if it would cover situations where compliance would be more costly for foreign investors. This would be a change from current policy; a Minnesota state procurement law was threatened by Canada under U.S.-Canada trade rules because its requirement for recycled paper content placed a greater burden on Canada where recycled paper is less available.
It is unclear whether this clause would comport with the intent of MAI negotiators to prohibit what they term de facto discrimination in the agreement. De facto discrimination is, literally, discrimination in fact as distinct from de jure discrimination, or discrimination in law. De facto discrimination can be intentional as well as unintentional; that is, a law could be enacted that is facially neutral but is meant to privilege domestic producers or hamper foreign investors.
It appears that the U.S. is attempting to differentiate between intentional discrimination, whether de jure or de facto, and unintentional discrimination. Yet the MAI’s nondiscrimination clauses require that treatment of foreign investors be "no less favorable" than that of domestic investors. This complicates the distinction between intentional and unintentional discrimination, given that some environmental laws could unintentionally affect foreign investors less favorably.
It is important to keep in mind that the core MAI non-discrimination provisions of National Treatment and MFN treatment were adopted from the GATT. Therefore, GATT rulings may – at the least – provide a good indication of how these principles would be interpreted by investment dispute panels. GATT panels have ruled that unintentionally discriminatory laws can nevertheless violate national treatment clauses on the grounds that these are more trade restrictive than necessary. The WTO dispute panel in the beef hormone case acknowledged that the E.U. ban on hormone-fed beef was not intentionally discriminatory, but argued that it was illegal under the GATT because it impacted U.S. beef producers more severely than domestic producers.
Status: The "in like circumstances" language proposed by the U.S. to narrow National Treatment and MFN treatment has yet to be accepted into the agreement by the other negotiators. Without agreement on this clause, its accompanying interpretive note would not be considered, unless of course, the U.S. withdraws the "in like circumstances" language and resubmits the clarificatory language on its own. A Chairman’s proposal submitted to annex 2 of the April 1998 draft indicates that the Chairman supports its inclusion. The Chairman’s proposals are not binding, and it is unclear what impact it will have on the negotiating positions of the delegates.
b. Language: "Nothing in this Agreement shall prevent a Contracting Party from requiring an investor of another Contracting Party, or its investment, to provide or allow the verification of information to ensure compliance with the first Contracting Party’s laws and regulations . . ." (MAI February 1998 draft, package of additional proposals).
Analysis: This language would be added to the MAI’s text on transparency, and would make it easier for governments to retrieve information from the overseas parent companies of foreign investors in order to ensure that the subsidiary is complying with the host country’s laws.
Status: The degree of support for this provision is unknown.
B. Recommendations for Governments.
The MAI does not establish binding obligations for investors regarding adherence to labor and environmental standards. All provisions concerning labor and the environment address the responsibility of governments to either uphold and enforce existing labor and environmental standards, or to adopt a handful of environmentally responsible policies. None of these provisions is binding on governments, although proposals to make the provisions on "not lowering environmental and labor standards to attract investment" binding -- and subject to consultation among MAI signatories (the Parties Group) -- have been included in both the February and April 1998 draft texts.
1. General Article on environmental laws and the extraterritorial application of environmental laws:
Language: "Nothing in this agreement shall be construed to prevent a Contracting Party from adopting, maintaining or enforcing any measure otherwise consistent with this Agreement that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns.
Likewise, no Contracting party shall adopt, maintain or enforce any environmental measure in a manner which would constitute a disguised restriction for investment outflows from that Contracting Party to another Contracting party, or for investment among Contracting parties" (Chapter III. Additional Clause on Labour and Environment, fn. 129) (emphasis added).
Analysis: This first paragraph of this provision contains the language of NAFTA 1114.1. It states that governments are free to promulgate environmental regulations as long as these do not violate any of the MAI’s provisions. This language does not provide guidance to arbitration panels as to the types of environmental laws that are consistent or inconsistent with the agreement. It does not clarify the extent to which governments can pursue an aggressive environmental policy. In short, it is a tautology that obfuscates rather than clarifies.
In the second paragraph of this proposal, the unprecedented step is taken of constraining regulatory bodies in terms of how they set limits on the movement of domestic capital. For instance, a country may wish minimize the ease with which domestic firms can flee to pollution havens. Legislators could enact a law requiring domestic companies to comply with domestic environmental laws when these are more stringent than those of the potential host government. Under this MAI proposal, such a law could very likely be ruled illegal. This clause, if it survives the negotiations, would[fix] further make the MAI from an instrument equalizing the treatment of foreign and domestic capital to one that prevents governments from regulating business in the interest of environmental protection and economic development policy.
By restricting how domestic regulators can regulate domestic investors, this proposal weakens rather than strengthens the degree to which the MAI affirms environmental protections. Any consensus forged during NAFTA negotiations, where it was recognized that investment could flee in response to increased environmental or labor standards, would be effectively abandoned if such a clause constituted the whole of the MAI’s "protection" for environmental lawmaking.
Status: This language has been proposed by one delegation, and the degree of support by other delegations is impossible to assess from the MAI draft.
2. Not Lowering Standards (Labour and Environment):
Status: While it appears that some form of the "not lowering standards" language will be included in the MAI, negotiators have not decided whether any such provisions would be binding on governments. Three delegations oppose any reference to labor in the "not lowering standards" section of the MAI.
3. Package of Additional Proposals" tabled by the U.S.
a. Language: "Nothing in this Agreement shall be construed to prevent a Party from adopting, maintaining or enforcing any measure otherwise consistent with this Agreement that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns" (Annex).
Analysis: This is the same NAFTA 1114.1 language that was proposed for a general article by another delegation. The U.S. proposes that this appear in the "Not Lowering Standards" section of the agreement. The same critique made earlier would apply to this language; it is tautological and useless.
b. Language: "Parties, through the cooperation of relevant international organizations and industry, where appropriate, should encourage investors wherever they operate to introduce policies and make commitments to follow environmentally protective standards regarding toxic chemicals and hazardous waste generation and disposal" (Annex).
Analysis: This language is taken from Agenda 21. It is not binding, employing the language "should" instead of "shall." This recommendation urges governments to address the environmental implications of toxic waste generation and disposal. However, it sets no mechanism in motion to begin even the voluntary engagement with international organizations, NGOs and industry to develop standards for waste generation and disposal, nor does it set any concrete goals towards such standards. It also does not set limits on the cross-border disposal and trade of hazardous waste, and fails to address the relationship between the MAI and the Basel Convention, which seeks to limit the cross-border transport of hazardous waste. It is strictly non-binding on both governments and investors.
c. Language: "Recognizing the right of each Party to establish its own levels of domestic environmental protection and environmental development policies and priorities, and to adopt or modify accordingly its environmental laws and regulations, each Party should ensure that its laws and regulations provide for high levels of environmental protection and should continue to improve those laws and regulations. Moreover, each Party should effectively enforce its environmental laws and regulations through appropriate governmental action" (Annex).
Analysis: This non-binding provision is adopted from the NAFTA side agreement on the environment. Note the use of the phrase "should ensure" rather than "shall ensure." It does not provide for the monitoring of environmental lawmaking among MAI signatories, and does not call for any institutional arrangement that would set goals for the general ratcheting up of environmental standards. This provision also may have the effect of preventing the extraterritorial application of environmental laws. By affirming the sovereignty of each country over environmental policy within its borders, it could be used to prevent home countries from setting environmental standards for domestic corporations operating overseas or across borders.
d. Language: "Each Party should require or undertake, as appropriate, and consistent with articles on most favored national and national treatment, environmental impact assessments for proposed investment in its territory that is likely to have a significant adverse impact on health or the environment and is subject to a decision of a competent national authority" (Annex)
Analysis: This is non-binding language from the Rio Declaration. This does not impose special screening requirements on foreign direct investment, but would have to be applied to all investments. This language also does not effectively address the disincentive to screening created by the rest of the MAI’s provisions. The phrase "and is subject to a decision of a competent national authority" may require countries to conduct environmental impact assessment only when a regulatory screening agency is in place.
Part III: Brief Summary of the MAI’s Political Picture
The official line of the OECD and USTR has been that MAI negotiations are not to resume until governments have a chance to sell the agreement at home. The date of October 1998 was chosen for OECD ministers to meet and decide how to proceed as concerns the MAI: keep the agreement in the OECD or move negotiations to the WTO.
Despite the stated intentions of OECD and USTR to put negotiations on hold until October 1998, there have been subsequent MAI negotiations on the bilateral level. So far, two meetings have been held over the past month among MAI negotiators from the US, the EU and Canada.
The first meeting was held in Ottawa where USTR met with the negotiators from the EU and Canada. In its briefing to non-governmental organizations, USTR claimed that the meeting was called on matters not relating to the MAI, but that negotiators "still found time" to discuss issues dealing with the question of country-specific exceptions under the MAI. They focused on the US’ proposed exception for subsidies and procurement programs, and the EU’s proposal to exempt the laws of Regional Economic Integration Organizations (REIO) from National Treatment and Most Favored Nation Treatment rules. The European Union is itself an REIO, and seeks to protect its laws, which only apply to member states, from challenge by non-member countries. In briefings with non-governmental organizations, USTR described these negotiations as simply "clearing cobwebs."
The most recent meeting was held in London on July 13, and dealt with the accession of non-OECD countries to the MAI. Although USTR attempted to downplay the significance of this meeting, it is clear that negotiators feel that they have made enough progress in negotiating the MAI’s investment rules that they can now address the terms on which non-OECD member-countries can join the agreement.
1 Prepared by Michelle Sforza, Research Director, Public Citizen’s Global Trade Watch, July 1998.
2 OECD, A Multilateral Agreement on Investment, May 1995.
3 According to a 1995 report on the MAI prepared by the OECD Committee on International Investment and Multinational Enterprises (CIME) and the OECD Committee on Capital Movements and Invisible Transactions (CMIT), the MAI would "go beyond existing commitments to achieve a high standard of liberalization covering both the establishment and post-establishment phase with broad obligations on national treatment, standstill, roll-back, non-discrimination/MFN, and transparency, and apply disciplines to areas of liberalization not satisfactorily covered. . ." (OECD, A Multilateral Agreement on Investment, May 1995, pp. 2-3).
4 For instance, taxation was limited to the MAI’s expropriation rules, and ambitions for the liberalization of financial services were slimmed. Plans to allow foreign investors to provide financial services not previously provided in host countries were abandoned, as many thought this right could threaten prudential measures taken by countries to protect banking systems. The MAI does guarantee that foreign investors can compete in existing financial services markets in host countries. In addition, parallel negotiations on liberalization in the financial services sector were occurring under the General Agreement on Trade in Services’ (GATS) Financial Services Agreement (FSA) in the WTO. The U.S. used a year-long delay in these GATS talks to extract significant liberalization commitments on the part of OECD members like Korea, as well as non-member states like Malaysia, Thailand and Indonesia. Negotiating multilateral rules on trade and investment on multiple-fronts has become a characteristic approach to 1990s-style economic integration.
5 OECD, Ministerial Statement on the Multilateral Agreement on Investment, 28 April 1998. "Ministers decide on a period of assessment and further consultation between the negotiating parties and with interested parts of their societies. . . . Ministers note that the next meeting of the Negotiating Group will be held in October 1998. Ministers direct the negotiators to continue their work with the aim of reaching a successful and timely conclusion of the MAI and seeking broad participation in it."
6 Because MAI provisions are not uniformly numbered, and because the versions of the April draft downloaded from the Internet will be paginated differently than those versions distributed at the OECD Ministerial, text citations will be numbered in the following way: Chapter numbers, Titles, sub-chapter numbers (if applicable) and paragraph numbers. In the rare cases where Chapters were outlined consistently, titles are omitted and citations are given in outline form (e.g. V. A 1(b)). The Chapter numbers have been reproduced from the table of contents of the April 24, 1998 MAI draft.
7 While the U.S. supports the ban on de facto discrimination in theory, it has proposed language that, if adopted, might limit the principle of de facto National Treatment for foreign investors. To the National Treatment provision that guarantees foreign investors "treatment no less favorable than domestic investors," would be added the phrase "in like circumstances." U.S. negotiators believe that this amendment would preserve laws that unintentionally affect foreign investors differently. This proposal has little support among the other OECD members, as it appears to contradict the principle of de facto national treatment for foreign investors. That is, most laws that affect foreign investors differently affect them less favorably. A foreign investor would not complain if a law unintentionally treated them more favorably
8 1917 Constitution of Mexico, Article XXVII.
9 NAFTA, Chapter 11.
10 While a majority of OECD members have attempted to protect specific laws banning or restricting foreign ownership in the broadcasting sectors and favoring the cultural products of domestic artists, the proponents of the cultural exception worry that these narrow reservations will be "rolled back" during future negotiations. They argue that the only effective protection is a total carve out so that cultural industries would not be defined as "investments" under the MAI.
11 Recent examples include the proposed divestiture by the states of New York and California from Swiss-owned banks in retaliation for their collusion with the Nazi regime and for their reluctance to return funds to descendants of Holocaust victims who held Swiss bank accounts. These measures could be challenged under the MAI as discriminating against the Swiss banks on the basis of their nationality.
12 In footnote 29 of the MAI text (III. Performance Requirements), one delegation notes that the question of the status of footnotes and interpretive notes "remains to be determined." Likewise, neither the status of annexes nor the status of "proposals" within annexes have been determined.
13 The proposed interpretive note on regulation states: "Articles – on General Treatment, and – on Expropriation and Compensation, are intended to incorporate into the MAI existing international legal norms. The reference in Article IV.2.1 to expropriation or nationalization and "measures tantamount to expropriation and nationalization" reflects the fact that international law requires compensation for an expropriatory taking without regard to the label applied to it, even if title to the property is not taken. It does not establish a new requirement that Parties pay compensation for losses which an investor or investment may incur through regulation, revenue raising and other normal activity in the public interest undertaken by governments. Nor would such normal and non-discriminatory government activity contravene the standards in Article IV.1 (General Treatment")" (Annex: Package of Proposals for Text on Environment and Labour, Interpretive Note). It is important to remember that the precise status of interpretive notes has not yet been established.
14 The two bracketed phrases reflect disagreement among OECD delegates as to the strictness of the standard to be set by the general treatment provision. If the conjunction "or" is used, a challenging nation must show only one of the standards (unreasonable or discriminatory).
15 See Jubilee 2000 Coalition, "Bank Admits HIPC Conditions Wrong," Debt Update, March 1998. The article quotes Joseph Stiglitz, Chief Economist of the World Bank: "the dogma of liberalization has become an end in itself and not a means to a better financial system. Financial markets do not do a good job of selecting the most productive recipients of funds or of monitoring the use of funds, and must be controlled. Deregulation led to the crisis in Thailand and the notorious "savings and loan debacle’ in the United States."
16 The OECD Code on Capital Movements and Code on Current Invisible Operations (Codes of Liberalization) both allow member countries to derogate from their obligations under the agreement if their "economic and financial situation justifies such a course" and provide that if "measures of liberalization taken or maintained in accordance with the [Codes] result in serious economic and financial disturbance in the Member State concerned, that Member may withdraw those measures" (Article 7 of each).
17 The inclusion of domestic firms appears strange at first glance, since the MAI is an agreement that is designed to deregulate international investment. But the drafters of the MAI were concerned that the failure to include domestic firms under these provisions would lead to de facto discrimination against foreign investors. For example, if governments were prevented from imposing performance requirements on foreign investors only, it could lead to a bias in favor of domestic firms. That is, governments who were seeking to accomplish certain goals through performance requirements would favor domestic businesses over foreign ones, because the former would be the only enterprises that could be legally held to such goals. Therefore, by proscribing performance requirements for domestic firms, MAI drafters prevent discrimination against foreign investors. But they also eliminate an entire array of economic development strategies, thus reducing the options available to governments for addressing local investment needs.
18 This ambiguity is why it is vital that investor-to-state dispute resolution provisions be eliminated from any international investment treaty. Even if NGOs manage to replace the MAI’s offensive substantive provisions, there is nothing preventing dispute panels from stretching the provisions to reflect an extreme laissez-faire approach.
19 For instance, in its report on the U.S. barriers to trade and investment, the E.U. claims that the U.S.’ regulatory system in particular poses problems to foreign investors. "Even if, in general, not intentionally discriminatory, the complexity of U.S. regulatory systems can represent an important structural impediment to market access" (E.U., 1997 Report on Barriers to Trade and Investment in the United States, July 19, 1997, p. 20).
20 The April 1998 MAI draft contains two annex sections: one for proposals offered by OECD member countries and the other for proposals offered by the Chair of the MAI negotiations. The country proposals are not numbered.
21 Three other draft proposals on dispute settlement appear in the annex section of the April 1998 draft. One allows nations who are not signatories to ICSID or the New York Convention to refuse to allow submission of a dispute to international arbitration under ICSID rules, in the case of the former, and to refuse to allow submission of its dispute concerning the recognition and enforcement of awards under the latter. The second proposal states that parties who refuse to comply with a dispute ruling can have their rights to participate in decisions by the Parties Group suspended. The third is a proposal for an interpretive note on Chapter V, D, 16(a) on investor-state procedures, which clarifies that "restitution in kind means factual restoration of property and property rights."
22 Dougherty, Carter. "U.S. Poised to Seek Extension of Deadline for OECD Investment Pact," Inside U.S. Trade, 13 February 1998.
23 Environmental measures have historically been among the most vulnerable to challenge under GATT rules, in spite of the exceptions that the agreement contains for some environmental, health and safety and resource conservation measures. For example, under the GATT, Venezuela successfully challenged a U.S. Clean Air Act provision concerning gasoline quality, despite a well-supported U.S. claim that the measure was protected by the GATT Article XX exceptions. Mexico successfully sued the U.S. at GATT over provisions in the Marine Mammal Protection Act that banned U.S. sale of tuna caught with encirclement nets that kill dolphins, despite a strong U.S. argument that the law met the exception for animal life and exhaustible natural resources.
24 WTO, Final Report. The U.S. law does contain exceptions to the import ban in three instances: (1) if the shrimp is farmed (aquiculture); (2) if the shrimp is caught in waters unpopulated by sea turtles (3) if the producers use TEDs and are properly certified. The fourth exception, which requires national certification for a nation’s producers, was struck down by the U.S. Court of International Trade. Environmentalists argue that the third exception, producer certification, is an inadequate means to protecting sea turtles because it is fundamentally unenforceable and can be easily exploited by "shrimp launderers" who do not use TEDs but who export their catch on boats with the devices.
25 The U.S. has signed agreements mandating the use of TEDs with 17 nations.
26 Argentina, Chile, Slovakia, Hong Kong are observers and would like to accede as charter members. Lithuania, Latvia and Estonia, though not observers, have also announced their intent to accede as Charter members should the MAI negotiations result in a complete agreement.
27 At the May 1998 50th Anniversary GATT celebrations in Geneva, President Clinton delivered a speech which essentially launched the Administration’s new public relations strategy in the wake of the fall 1997 fast track defeat and the domestic opposition to the MAI and to NAFTA expansion. This charm initiative aims to disarm critics of globalization with token gestures of inclusiveness, while at the same time, the Administration pushes same agenda for globalization forward by engaging in intensive bilateral negotiations on the MAI and the New TransAtlantic Economic Partnership (or TAFTA – the TransAtlantic Free Trade Agreement). This strategy is also reflected in the recently launched FTAA (Free Trade Area of the Americas) negotiations, where a Committee on Civil Society has been proposed to ostensibly collect the views of NGOs and submit them to negotiators. However, as of yet there is no process for ensuring that the views of environmentalists, labor, human rights groups, development groups or consumer groups carry any weight in the negotiations, and individual governments are under no obligation to consider these views. Indeed, in each of these fora, formal, binding negotiations are underway following agreed upon agendas that promote only a more intense version of the status quo trade and investment liberalization characterized by NAFTA and the WTO.
28 As mentioned earlier in this piece, it is unclear what significance the Chairman’s proposals have in terms of indicating wide support for seriously grappling with the environmental and labor implications of the MAI. The proposals themselves have no binding authority, and some delegates continue to oppose any environmental and labor provisions in the MAI at all. In fact, it was not until quite recently that a consensus was reached that the environment should even be mentioned in the non-binding Preamble of the MAI.
29 If the U.S. proposal were accepted, the National Treatment provision would read, "Each Contracting Party shall accord to investors of another Contracting Party and to their investments, treatment no less favourable than the treatment it accords in like circumstances to its own investors and their investments. . .". Likewise, the MFN provision would read, "Each Contracting Party shall accord to investors of another Contracting Party and to their investments, treatment no less favourable than the treatment it accords in like circumstances to investors of any other Contracting Party or of a non-Contracting Party. . .". p. 13 (emphasis added).