Alliance for Responsible Trade

Background

The former Director General of the World Trade Organization (WTO), Renato Ruggiero, has compared the negotiation of international investment agreements to "writing a constitution of a single world economy." Indeed, the investment rules written into the North American Free Trade Agreement (NAFTA) and the failed Multilateral Agreement on Investment (MAI) are similar to constitutions that determine what governments can and cannot do.

Both NAFTA and the draft MAI build on the principle of "national treatment," which requires treating foreign investors "no less favorably" than domestic firms. They would liberate nearly every regulation on the free circulation of capital, including fly-by-night capital. They prohibit performance requirements and contain mechanisms that permit corporations to sue governments over measures that undermine their profits. Although negotiations on the MAI have ended within the OECD, corporate executives participating in the Business Forum of the Americas have explicitly suggested that, "a hemispheric investment agreement draw upon the principles of the MAI." Proponents of the MAI also want to incorporate its measures into any revision of the Trade-Related Investment Measures (TRIMs) and General Agreement on Trade in Services (GATS) codes within the WTO.

All of these investment agreements are biased in favor of maximizing the ability of transnational investors to move freely around the globe with minimum interference from national governments or international regulatory bodies. As Roberto Bissio of the Third World Institute in Montevideo has written: "What is at stake is a struggle between the ambition of transnational corporations to be free of state controls and the capacity of ... citizens and the governments we elect to decide on our own destinies."

In this chapter, we counter with an investment code based on principles that are fundamentally different than those in the MAI and NAFTA.

Guiding Principles

1. Foreign investment is welcome in our countries, provided that it adheres to regulations that enforce the economic and social rights of citizens and environmental sustainability. Foreign direct investment (FDI) can play a positive role when it is invested in productive rather than speculative activities, when it transfers appropriate technology and when it facilitates access to markets and creates employment consistent with democratically determined national development plans. It can also have negative effects when it absorbs local savings, disrupts local industries, pollutes the environment, or when the jobs it creates are in enclaves disconnected from the national economy. It is also negative when large flows of fly-by-night capital exit, thus destabilizing economies, or when it results in speculation against national currencies.

2. Regulations must be democratically determined by governments in consultation with their people. However, a minimum level of basic regulations should be agreed to multilaterally so as to prevent unfair competition between countries. Competition that results in a lowering of standards in a race to the bottom is by definition unfair. For example, if a government were to lower its standards or refuse to enforce minimum labor and environmental laws in order to attract foreign investment, it would be guilty of unfair competition.

3. In the event of a conflict, internationally recognized human, labor and environmental rights must take precedence over investors' rights. At a minimum, the signatories must ratify the following international treaties and agreements: the Universal Declaration of Human Rights; International Labor Organization conventions concerning freedom of association, collective bargaining, child labor, forced labor and workplace discrimination; the United Nations Convention for the Elimination of All Forms of Discrimination Against Women; the Covenant on Economic, Social and Cultural Rights; the San Salvador Protocol; and international environmental agreements, including the Montreal Protocol on Substances that Deplete the Ozone Layer; the Basel Convention on the Control of Trans-boundary Movements of Hazardous Wastes and their Disposal and the Kyoto agreements on greenhouse gas emissions.

4. International agreements on investment regulation must take into account the asymmetries of power and different levels of development that exist between countries. Agreements should involve non-reciprocal concessions by the more powerful partners and recognition of asymmetries and differences. This is particularly important for small economies and island states which need special and differential treatment.

5. Agreements must also respect the diversity of political jurisdictions (e.g., states, provinces, municipalities and Aboriginal governments) that exist within some countries.

Specific Objectives

Investment regulation should not mean imposing excessive controls on investors or establishing protections for inefficient industries. Rather, it should involve orienting investment and creating conditions to enable investment to serve national development goals while obtaining reasonable returns.

Governments should have the power to:

1. implement viable national development policies appropriate to their peoples' goals, while remaining open to the world economy;

2. encourage productive investments that increase links between the local and the national economy and screen out investments that make no net contribution to development, especially speculative or very short-term portfolio investments that lead to rapid capital outflows, creating instability and economic crises;

3. make foreign investment play an active role in the creation of macroeconomic conditions for development;

4. protect small, local, family and community enterprises from unfair foreign competition and require corporations to give preference to small producers, women, indigenous communities and other traditionally marginalized groups when extending contracts or credit in the case of financial corporations;

5. require that corporations respect the ancestral intellectual property rights of indigenous peoples and farming communities;

6. control the rate of exploitation of natural resources to prevent over-production;

7. allow for legal measures that preserve public or state ownership in some sectors (e.g., petroleum), exclusive national ownership in other sectors (e.g., broadcasting), and obligatory national participation in the ownership of other sectors (e.g., finance); and

8. establish a separate set of rules for investment in culture within any hemispheric agreement, since cultural products are both trade commodities and instruments of social communication. These rules would require acceptance of government provisions such as subsidies, foreign investment restrictions, and content requirements to foster an ongoing domestic cultural presence and preserve linguistic diversity.

Performance Requirements

Performance requirements need not be protectionist measures. Rather, they should be a means through which host countries share the benefits of corporate investment. The prohibitions on performance requirements in NAFTA, the failed MAI and the draft text of the FTAA would prevent national and local communities from implementing economic development policies that utilize investment for the benefit of ordinary people. Prohibitions on performance requirements go beyond national treatment in that they deprive governments of important policy tools even if they are applied equally to domestic and to foreign investors. Thus they are absolute and not just relative prohibitions.

Governments should have the power to impose performance requirements on investors such as are necessary to accomplish the following goals:

1. integrate foreign investment into local development plans by requiring investors to achieve a given percentage of national, regional or local content and requiring enterprises to purchase inputs locally (this would prevent foreign enterprises from becoming enclaves that only appropriate natural resources and exploit workers);

2. give preference to hiring local personnel;

3. achieve a minimum level of local equity participation in an investment;

4. respect labor standards that are at least as high, but never lower, than those set by International Labor Organization conventions on freedom of association, collective bargaining, child labor, forced labor and workplace discrimination against women and minority groups;

5. implement the United Nations Convention to Eliminate All Forms of Discrimination Against Women;

6. fulfill international environmental treaties such as the Montreal protocol on ozone depletion or the Kyoto agreements on greenhouse gas emissions and others listed in the chapter on environment and natural resources;

7. achieve the transfer of appropriate technology;

8. give adequate notice to local communities of intent to shut down or move; and provide adequate compensation to the local community, in conformity with minimum labor standards and payment for any environmental clean-up; in addition, governments should have the right to freeze the assets of a corporation until it adequately indemnifies workers and communities affected by the withdrawal of an investment, violation of a collective agreement or environmental damage;

9. license technology for others to use when justified for social or humanitarian purposes, as in the case of compulsory licensing of generic medicines;

10. provide incentives for the reinvestment of profits;

11. require local permission for the exploitation of natural resources, such as fish or forestry products, for purposes of ecological conservation;

12. contribute to workers' pension funds, health and unemployment insurance benefits, and pay their fair share of taxes to support economic (e.g., roads) and social (e.g., education) infrastructure;

13. avoid the destabilizing effect of simultaneous and massive withdrawals of fly-by-night portfolio capital by requiring that portfolio investments or investments in the financial market remain in place for a minimum period; one way to achieve this goal is to require that a portion of portfolio investments (e.g., 20-to-30%) be deposited for a time (e.g., one year) with the central bank;

14. limit the amount of assets that can be repatriated in a given year and the kind of financial investment that can be transferred through such measures as taxation of financial transfers.

Expropriation and Investor-State Disputes

Corporations have taken advantage of NAFTA's ill-defined references to "indirect" expropriation and NAFTA's investor-state dispute settlement process (Articles 1115-1138) to challenge significant government policies affecting vital areas of concern. Corporations have alleged that measures which fall under the normal regulatory sphere of government action, especially in the area of protection for the environment and human health, constitute measures "tantamount to expropriation" of their assets because they allegedly reduce their anticipated profits.

The draft text of the FTAA includes, although it is still within brackets, the same "investor-state" mechanism as that in NAFTA.

Ethyl Corporation has successfully used NAFTA to revoke a Canadian ban on a gasoline additive, MMT, a known nerve toxin. A US-based corporation, S.D. Myers Inc., which treats transformers containing toxic PCBs, has also sued the Canadian government for losses incurred due to a ban on export of wastes contaminated with toxic PCBs. Methanex, a Canadian firm, is suing the U.S. government for US$970 million because the state of California ordered a ban on the chemical MTBE in order to prevent pollution.

The Mexican government has been ordered to pay US$16.7 million in damages to Metalclad, a U.S. firm, because the municipality of Guadalcazar in the state of San Luis Potosi refused to grant a permit for a hazardous waste disposal facility. Local water reserves have been contaminated and the governor had declared the site an ecological zone.

In some cases corporations have used NAFTA to seek to reverse the results of domestic court proceedings and to circumvent normal commercial civil litigation.

Collectively, these suits demonstrate a wide range of challenges to government regulatory powers. They are particularly disturbing because of their implications for the ability of governments to safeguard human health and the environment. They also pose an enormous challenge to the democratic process by enabling corporations to veto national regulatory processes. These cases have a chilling effect on the willingness of governments at all levels, federal, provincial or state, and local to enact new regulatory measures lest they be challenged under NAFTA.

We oppose investor-state dispute settlement mechanisms in the FTAA and in all other trade agreements. The existing investor-state mechanisms must be removed from NAFTA.

We oppose incorporating a broad definition of investment and inclusion of "measures tantamount to expropriation" or "equivalent to expropriation" in international investment and trade agreements. We particularly object to the inclusion of cultural funding in the definition of investment.

The expropriation of corporate assets to serve vital community needs should be permitted. Compensation for expropriated resources should be determined by national law with due regard to the value of the initial foreign investment; the valuation of properties for tax purposes and the amount of wealth taken out of the country during the duration of the investment. Investors should have the right of appeal to national courts in cases where they deem compensation to be inadequate. Appeal to international tribunals, however, should occur only after all national procedures have been exhausted.

Dispute Resolution

Disputes should be adjudicated first under the national laws and tribunals of the host country where citizens affected by decisions have opportunities for participation. Citizen groups, indigenous peoples, local community development organizations, and all levels of government should have the right to sue investors for violations of this investment code. All judicial and quasi-judicial procedures, such as arbitration, shall be fully transparent and open to public observation. Intervenor funding shall be made available to groups such as indigenous communities and environmental groups to enable their participation in legal proceedings.