Global Policy Forum

A Concise Guide to the


By Michelle Sforza-Roderick, Scott Nova and Mark Weisbrot

The Preamble Center for Public Policy

What is the MAI?

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

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

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

The MAI and the Global Economy

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

Proponents' Views of the MAI

The Need for Investment Protection

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

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

The Economic Benefits of Foreign Direct Investment

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

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

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

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

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

Opponents' Views of the MAI

Investor Rights without Investor Responsibilities

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

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

The MAI and the "Race to the Bottom"

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

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

The MAI and the Threat to Sovereignty

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

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

Domestic Laws that May Violate the MAI

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

Some laws that protect the environment and public health could be ruled to be discriminatory against foreign investors, to constitute expropriation of investor assets, or to be illegal performance requirements, opponents argue. Examples include:
1)Bans on the production or sale of dangerous products;
2) Laws designed to conserve valuable natural resources or land;
3) Requirements that recycled content be used, when possible, in the production process; and
4) Public contract preferences for environmentally responsible firms.

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

Opponents also cite a range of laws encouraging local economic development, that because they may put foreign investors at a competitive disadvantage, could be subject to challenge under the MAI. These include:
1)Programs earmarking economic development funds for local businesses;
2)Community reinvestment laws requiring banks to invest in economically deprived areas;
3)Set-asides for minority- and women-owned businesses;
4)State and municipal programs earmarking loans and subsidies to home-grown businesses;
5)Rules promoting the investment of public pension funds in local businesses and/or in socially responsible businesses; and
6)Set-asides, targeted loan and grant programs, and special regulatory relief for small businesses.

Laws designed to enhance financial and economic security could also be illegal under the MAI, opponents assert. Laws that could be challenged include:
1)"Speed bumps" or other restrictions on short-term stock, bond and currency transactions which countries use to avoid financial crises and
2) Laws designed to protect jobs by requiring corporations that move jobs out of a country to pay tax penalties.

Opponents believe that the MAI may also prohibit unilateral sanctions against human rights violators, including:
1) Laws prohibiting U.S. firms from investing in countries with poor records on human rights, labor rights and the environment and
2) Laws that block investment in the U.S. by companies based in such countries.


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

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

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

Recent Legal Cases Under Economic Agreements

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

Last month an American chemical company filed a lawsuit against the Canadian government under the terms of NAFTA, the first multilateral agreement to allow private companies to sue governments for damages. The Canadian government had just banned the import and transport within Canada of the gasoline additive MMT on the grounds that it is a dangerous toxin (MMT is currently banned in California). The maker of the additive, the Ethyl Corporation, has sued the Canadian government for $251 million, arguing that MMT is safe and that Canada's ban on the additive constitutes an illegitimate expropriation of Ethyl's assets. Ethyl had tried, unsuccessfully, to use the threat of a suit to dissuade the Canadian Parliament from passing the ban in the first place. Opponents fear that under the MAI, TNCs in the 29 OECD countries would follow Ethyl's example and use the power conferred by the agreement to challenge environmental and other safeguards in order to sue governments.

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

Proponents of the MAI would defend the WTO's ruling on the grounds that the decision was based on the best available scientific evidence. In this view, that is exactly the purpose of establishing such a dispute resolution mechanism: to ensure that only legitimate health or safety concerns, supported by scientific research, can be used to bar the entry of another country's products. The Ethyl case can be viewed similarly: if the additive MMT is really a threat to public health, then the arbitration panel will find Ethyl's case to be without merit. If the additive is not really dangerous, then the law should be overturned.

More Information on Social and Economic Policy
More Information on the Multilateral Agreement on Investment

FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C íŸ 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.


FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.