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The Potential Impact of the MAI and Globalization in California

California Fair Trade Campaign

1188 Franklin Street, Suite 204, San Francisco, CA 94109
415-775-0824 FAX

Examples of State and Local Policies to Promote Local Economic Development, Human Rights and Environmental Protection That May Be Threatened by the MAI.

The proposed Multilateral Agreement on Investment (MAI) would give wide-ranging new rights to international investors. These new rights, however, could come at the expense of state, county and municipal governments’ regulatory and legislative capabilities.

The venue for MAI negotiations may shift in coming months and years. The MAI may move from the Paris-based Organization for Economic Cooperation and Development (OECD) to the World Trade Organization or future commercial pacts such as the Africa trade bill and the Free Trade Area of the Americas (FTAA). Under any name, however, local U.S. government officials and citizens’ groups warn that the MAI’ s broad investor-protection rules are dangerous.

Groups that have researched the impact of international trade and investment agreements on state and local sovereignty have cited many state and local laws, existing and proposed, which could be challenged under the proposed Multilateral Agreement on Investment (MAI). For example, in 1997, the Western Governors’ Association (WGA) released the report, “The Multilateral Agreement on Investment: Potential Effects on State & Local Government.”

How MAI Provisions Could Impact State and City Policies

The MAI stipulates that corporations of member countries receive “national treatment” a term that requires countries to treat foreign investors and investments no less favorably than domestic ones. Under national treatment, countries may not, for example, place special restrictions on what foreign investors can own, maintain economic assistance programs that solely benefit domestic companies, or require that a corporation hire a certain percentage of managers locally.

The MAI s “Most Favored Nation” (MFN) provision requires governments to treat all foreign countries and all foreign investors the same with respect to market access and regulatory laws. Laws prohibited by MFN would include economic sanctions that punish a country for human rights violations by preventing corporations from doing business there.

The MAI would place limitations on “performance requirements,” which are laws that require investors to meet certain conditions if they want to establish an enterprise in a particular locale. Performance requirements attached to tax incentives or other government aid (for example, low-interest development loans) would also be banned. Performance requirements would be banned even when they do not discriminate against foreign investors.

The MAI includes a ban on “uncompensated expropriation of assets.” The MAI would require governments to compensate investors immediately and in full when they are deprived of any portion of their property or planned investment opportunity. Expropriation would be defined not just as the seizure of property but would also include governmental actions “tantamount to expropriation,” which could include regulatory measures such as laws that limit land use in order to protect the environment.

The MAI would ban “restrictions on the repatriation of profits or the movement of capital.” Countries could not prevent an investor from moving profits from the operation or sale of a local enterprise to that investor’s home country. Nor could countries delay or prohibit investors from moving any portion of their assets, including financial instruments like stocks or currency. Local efforts to curb speculation and channel investment into long-term economic development strategies would be illegal under this provision.

Some Existing California Laws that Could be MAI-Illegal:

Local Policies

The City of Los Angeles has a “Worker Retention Law,” which requires new city contractors that are replacing a previous contractor to keep the previous employees for at least 90 days, with further employment based on a performance review. This law could be challenged under the MAI as an illegal performance requirement.

The City of San Jose recently passed an extensive living wage law that included a “labor peace” measure. The measure will require city service contractors to provide “assurances of protection against labor discord” which officials say would make it easier to organize unions. This measure could be challenged as an illegal performance requirement.

The City of Santa Clara has a “Manufacturing Personal Property Tax Return,” which requires companies getting tax breaks to create at least 10 jobs paying $10/hour or more and stipulates that the county “will look more favorably” upon businesses with certain socially responsible practices. This law could be challenged as an illegal performance requirement.

The cities of San Francisco, Oakland, Santa Monica, Berkeley and Alameda County have already passed “selective contracting” ordinances that make it illegal for these entities to enter into contracts with firms or groups that do business with the military regime in Burma. These ordinances could be challenged as violations of MFN or national treatment.

State Policies

The state Department of General Services provides a 5 percent bid preference on service and commodity contracts valued at more than $100,000 if the business work site is located in a “distressed area” or an “enterprise zone,” as defined by the Governor’ s Office of Planning and Research. This law could be challenged under the MAI’ s national treatment provision.

In 1996, California passed an anti-slave labor law, which prohibits the state’ s purchase of foreign-produced equipment, supplies or any other materials made by “convict, forced or indentured labor.” This law could be challenged as an illegal performance requirement.

State Treasurer Matt Fong instituted a boycott on state investments in Swiss banks that profited on gold stolen from Holocaust victims by the Nazis. This policy which helped force the banks to agree to an August 1998 settlement in which they paid Holocaust survivors and relatives of Holocaust victims could be challenged as a violation of the MFN or national treatment provisions.

California provides a 40 percent corporate income tax deduction for expenditures on renewable energy or pollution control machinery in an economic development area. This could be challenged under the MAI’ s national treatment provision.

California protects coastal areas by requiring that new development adjacent to sensitive habitat areas be designed to avoid adverse impacts. The coastal zoning law also limits conversion of agricultural land to other purposes, and requires most development to be next to an existing developed area with infrastructure. This law could be challenged as an illegal performance requirement or as an “expropriation” of investor assets.

California mandates a minimum percentage of recycled content in newsprint. California requires recycling equipment to process at least a specified percentage of material generated within the state of California in order to receive tax benefits. California also has statutory preferences for the purchase of materials with recycled or recyclable content. These statutes could be challenged as illegal performance requirements.

California has imposed a moratorium on fishing licenses in the salmon industry until the fleet size falls below 2,500 vessels as a means to limit over-fishing. California also has a significantly higher fee for nonresident commercial fishing licenses than for resident licenses. This rule could be found in violation of the MAI because it has the effect of excluding new market entrants to the disadvantage of foreign interests.

Proposed Laws and Accountability Measures that Could be MAI-illegal

The City Council of Los Angeles is currently considering a “selective contracting” ordinance that would target the military regime in Burma. The proposed ordinance would make it illegal for contractors with the city of Los Angeles to do business with the military regime in Burma. Such an ordinance could be found to be in violation of the MFN or national treatment rules.

Several measures proposed in Los Angeles and San Diego would have given preferences for local firms in bids for city contracts:

One proposal, submitted in 1992 by then Los Angeles City Councilman Zev Yaroslavsky, would have given preference to California companies in bids for city contracts through an amendment to the City Charter.

Another proposal introduced in the State Assembly by Assemblyman Richard Katz (D-Sylmar) in 1992 would have given preference to firms that provide jobs, buy goods, and pay taxes in Los Angeles County in bidding for local public transit projects.In 1992, San Diego City Council members George Stevens and Bob Filner called for the revision of the San Diego City Charter to ensure that local businesses receive preferences in contracting for city public works projects and purchases.

Such initiatives, because they explicitly favor local firms (and thus “discriminate” against others) could be challenged under the MAI’ s national treatment provision.
The Metropolitan Alliance, a coalition of Los Angeles community groups, has suggested a list of principles for public subsidies that go to firms and industries. This group recommends that public subsidies go only to firms that:

  • Promote a jobs strategy targeted at the poor and young people, provides living wages and a guaranteed right to organize;
  • Protect the environment and meets high health and safety standards;
  • Support development that focuses on growing, locally-based firms.
  • These strategies may conflict with MAI provisions on national treatment and the agreement’s restrictions on performance requirements.

    For more information on the MAI and globalization, contact the Preamble Center at (202) 265-3263 or visit Preamble’ s website at http://www.preamble.org.

    In California contact the California Fair Trade Campaign at 415-775-0822.