Andrea Durbin & Mark Vallianatos
Friends of the Earth-US
April 1997
Globalization, deregulation, free trade, private capital flows, foreign
direct investment ... environmentalists are starting to sound a lot like
Wall Street Financiers these days. We have to, as the fight for
environmental protection is being fought on a new and dangerous
battlefield: the global economy. We first witnessed this when governments
ratified the North American Free Trade Agreement (NAFTA) and the latest
round of General Agreement on Tariffs and Trade (GATT), international
agreements that are a major attack on environmental, public health, or
worker safety laws. Under these agreements, international bodies such as
the World Trade Organization can rule against any public interest law that
interferes with free trade. And now, proponents of free trade and
globalization are turning their sights to the next target for
liberalization and deregulation -- foreign investment.
Private Capital: Facts and Figures
Foreign investment has become a major engine for growth and development around the world. In 1996, private capital flows reached an all-time high of $231 billion dollars, a dramatic jump from the $45 billion level in 1990. Mostly concentrated in industrialized countries, foreign investment in the newly emerging economies has increased, especially in certain South East Asian and Latin America nations. In 1995, developing countries received between 35 and 40 percent of the total amount of foreign direct investment worldwide, up from a 21 percent share in 1990.
Who Are the Investors?
To assess the implications of foreign investment, we must ask: who is doing the investing? In a word, corporations. Transnational Corporations (TNCs) are the only entities that can afford to go on a global merger and acquisition shopping spree.
Of the 100 largest "economies" in the world, 51 are corporations and only 49 are countries. Transnational corporations account for two- thirds of trade in goods and services; one-third between parent companies and their overseas affiliates and another one-third consists of exchanges between unrelated companies. International investment is even more concentrated than trade. Just one hundred TNCs own one-third of the world's foreign investments. As author David Korten so aptly put it in his recent book, the global economy is allowing corporations to rule the world. Liberalizing investment rules is one more giant step in that direction.
Do We Need More Rights For Big Corporations?
The need for an agreement liberalizing foreign investment rules seems questionable since foreign investors can largely dictate the terms of their investment. The demand for foreign investment outweighs the supply, giving foreign investors a significant advantage when negotiating with governments about conditions, tax packages and investment restrictions. Despite these favorable conditions for investors, corporations and some governments, including the United States, are pushing to negotiate an agreement that would grant unprecedented rights to corporations, without addressing their responsibilities and obligations to the environment, workers and communities.
Negotiated By and For Rich Nations
Member countries of the Organization for Economic Cooperation and Development (OECD), often referred to as the "rich countries' club", began negotiations for a new international agreement on foreign investment in 1995. The aim of the agreement, called the Multilateral Agreement on Investment (MAI), is to liberalize investment rules among nations and expand foreign investment worldwide.
What Will the MAI Do?
The Multilateral Agreement on Investment (MAI) would open up each and every sectors of a signatory nations' economy to foreign investment. Currently, many countries maintain restrictions on foreign investment in some sectors of the economy for national interest. For example, Mexico restricts foreign investment in its petroleum industry; some U.S. states like Arizona, restrict non- residents from using public lands for grazing, mining, oil and gas exploration.
The MAI would also require signatory countries, including their states and localities, to treat foreign investors the same as local companies. This would mean that foreign-owned companies would be granted the same privileges as domestic companies in terms of taxes and regulations. The agreement goes beyond this principle of equal treatment. Under the MAI, governments cannot require foreign-owned companies to meet performance standards governments often demand of big investors -- such as hiring a percentage of local people, requiring a certain amount of local material used in production, using more stringent environmental standards or transferring the best available technology -- even if these conditions are imposed on domestic companies. Governments, particularly developing countries, often use investment requirements as a means to ensure that the local population benefits more directly from the foreign investment, or at the very least is not harmed.
For example, Venezuela requires that for enterprises with ten or more employees, foreign employees are restricted to 10 percent of the work force and to 20 percent of the payroll. Chile restricts the repatriation of capital for one year to discourage short-term speculative investment. Canadian law mandates that the majority of all corporate boards must be Canadian citizens. The MAI's equal treatment principle and ban on performance requirements would restrict the types of laws a government can impose on foreign-owned companies and capital, leaving a government with few options ensure that their country directly benefits from foreign investment.
MAI's Corporate Courts': Challenging Laws and Regulations
Beyond liberalizing investment rules, the MAI would also establish a powerful process to enforce these far-reaching rules. The MAI would set up a binding dispute resolution process to which corporations and their home nations would have access. If a corporation believes it is unfairly affected by a national requirement, it could seek a full hearing and action through this mechanism that would mandate a response from the country. However, this process does not give equal access to citizens or even governments who believe they have been harmed by the negligence or misconduct of corporations.
The experience from NAFTA has shown that allowing corporations broad access to dispute resolution processes can lead to a "chilling effect" on environmental, health and worker legislation. While not as comprehensive and far-reaching as the proposed MAI, NAFTA has already begun to liberalize investment rules between the United States, Canada and Mexico. In the short period NAFTA has been in effect, corporations have used the dispute process to challenge pending and existing environmental regulations in Canada and Mexico. A U.S. company, Ethyl Corporation, has filed notice that it will seek a $201 million claim against Canada if a bill pending in the Parliament that would ban imports and inter-provincial trade in a fuel additive, MMT, is passed. Even though this additive is possibly toxic to humans and is suspected of damaging air pollution control technologies, Ethyl claims that regulating MMT in this way would be an expropriation' because it affects the company financially through potential market losses.
Bidding for Foreign Investment
Many countries around the world, and even U.S. states, bend over backwards to attract investment and to provide persuasive incentives to open up a factory or production line. These incentives include tax breaks, waivers for environmental regulations, and/or unrestricted capital mobility to attract investors.
In 1995, the Philippine Government changed its mining law to permit foreign investors to own 100 percent of a mine and to fully repatriate profits. In some other sectors, the Philippines prevents foreign investors from owning more than 40 percent of an enterprise. In Dominica, a small Caribbean island known for its rich biological diversity, Australia's giant mining company, Broken Hills Proprietary (BHP), has advised the government on how to "update" their mining law to encourage foreign investment by making changes favorable to companies like BHP. The invasion of large-scale mining companies hoping to find rich minerals on this tiny island would drastically alter the future development of this small nation that until now has depended on agriculture and tourism for its GNP.
If This Agreement is So Bad, Why Haven't You Heard of It?
If this agreement has such serious consequences, then why haven't heard about it in the news or read about it in the newspapers? Because proponents of the MAI have deliberately kept a low profile about the negotiations.
The OECD aims to finish negotiating this agreement amongst its member countries within the next year. The Clinton Administration has had little to no consultation with public interest groups -- not to mention Congress -- on what it hopes to achieve in these negotiations. Once negotiated by industrialized countries, the plan is to invite developing countries to join the agreement, without giving them a role in the negotiations. Many developing nations, such as Malaysia and India, have strongly criticized this process and have demanded that the negotiations take place in a more open and inclusive setting, such as United Nations Conference on Trade and Development (UNCTAD). In the words of India's Minister of State for Commerce, this agreement strongly advocates "the interest of TNCs by trying to camouflage it with the argument that what is in the interest of TNCs will automatically also promote the interests of development countries."
Winners and Losers
The winners in this agreement will be the Transnational Corporation; the losers will be the public, the environment and any hopes for sustainable and equitable development. This is because this agreement will establish and codify unprecedented rights for corporations with no word about their responsibilities and obligations to operate in an environmentally sound manner, to be more transparent and provide information to communities in which they operate, to abide by worker protection laws and fair labor standards, and to respect human rights. The environmental and social obligations of corporations has not even made it on to the agenda in any serious way.
In today's world dominated by private capital flows, where corporations and investment fund managers have more say in a nation's future than a democratically elected government, we need leadership from the United States and the other OECD nations to guarantee that corporations have some responsibilities, not just more privileges, that they become accountable to the public's interest and not just to their interest in profit.
As the MAI is currently envisioned, it is a risk to environmentally and socially sustainable development. However, if properly conceived with public input, it could provide an opportunity to tackle some of the tough problems raised by uncontrolled capital mobility and enforce accountable environmental and social standards for corporations. While trade and investment agreements are not the ideal forum for addressing issues of environmentally and socially sustainable development, they are the only forums that seem to have the political interest and will of governments and they are the forums that continue to impede progress on sustainability issues. Nations should use the agreement as an opportunity to exert some control over the rampant race of private capital flows.
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