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The OECD Multilateral Agreement on Investment

Key Concepts And The Trade Union Response

Discussion Paper

Roy Jones

Senior Policy Advisor - TUAC (1)- OECD

January 1998


Executive Summary

The negotiations to conclude a Multilateral Agreement on Investment (MAI) by OECD governments are approaching the deadline of April 1998. Designed to deepen and broaden international investment through its core concept of non-discrimination between domestic and foreign investors, the MAI would if agreed extend economic globalisation through the inclusion of developed and developing countries. Simultaneously, multinational enterprises (MNEs) would have the right to force governments to change non-MAI conforming laws or face punitive damages. Pressure by trade unions, and NGOs alongside a growing realisation among some governments of the dangers posed by the original draft MAI have forced changes to the text. In tandem, there is a more concrete possibility that binding rules to protect labour and environment standards will be included in the Agreement.

The aim of this discussion paper is to extend the debate, shed some light on and demystify the MAI by pointing to its controversial aspects, and to highlight the work that has been done by trade unions and others to ensure that labour and environment issues are adequately addressed in the Agreement. Following a brief review of the impact of globalisation on workers, the paper discusses the emergence of the MAI, and then identifies its key concepts plus the controversies surrounding them. The trade union response is then set out, followed by a summary of new developments. Lastly, the paper looks at the issues that could make or break the MAI, and the mechanisms for implementation and ratification.

Background - Globalisation and Labour Standards

Globalisation - the accelerated integration of economic activity across national or regional boundaries - has become the catchword dominating economic and social policy debate at the end of the 20th century. Whilst international trade continues to play a major role in the globalisation process, it is foreign direct investment (FDI) driven by multinational enterprises (MNEs) that has now become the main engine of globalisation. Over the last decade, FDI has grown four times as fast as GDP, and three times as fast as trade. The number of MNEs has risen from 7,000 in the early 1990s to around 40,000 today. Within this, MNEs are heterogeneous in nature, both in terms of size, and sectoral orientation. As to the former point, while the number of small and medium size enterprises has increased in the total number of MNEs operating, there has been an increasing concentration and monopolisation taking place, with just one per cent of enterprises accounting for fifty per cent of global FDI. On the latter point, FDI in services now outstrips that in manufacturing.

Such is the complex nature of trade and investment relations, however, that MNEs are also now the main players in trade development. For example, around one third of trade is intra-MNE trade, while a further third is between multinationals.

MNEs therefore, reach into the lives of virtually every worker today - even if not directly employed - through complex webs of sub-contracting, and outsourcing. Privatisation today often brings with it the transfer of ownership into foreign hands. At the pinnacle stand the multinational institutions that control the financial markets, and which set or influence interest rates that ultimately decide the direction that economies take.

It is true that MNEs can bring economic and social gains - that is not in dispute. But it is equally true that they can negatively impact on workers' terms and conditions, and can affect a country's development path both positively and negatively. The last edition of International Union Rights rightly drew attention to the impact of MNEs on workers. It can be summarised in terms of the proposition that capital mobility (and more importantly its potential mobility) has dramatically shifted the balance of power away from states and workers to that of the owners of capital, leading to pressure on governments for further cuts in capital taxation, greater market liberalisation including the marketisation of public services, labour market deregulation, and privatisation.

For workers and unions this potential to 'exit' and re-locate operations has influenced the bargaining process. As the head of Germany's largest employers' federation for the engineering and electrical sectors succinctly put it when referring to the power of employers: "Today they say I don't care about the agreement any more, because I have four or five excellent exit routes. I may simply relocate 10, 000 jobs to the Czech Republic or I may outsource."(2) This was reinforced by a 1996 TUAC survey of its affiliates views on the working of the OECD Guidelines for Multinational Enterprises. The survey found that MNEs are increasingly using the threat of de-localisation to influence the outcome of collective bargaining, withholding information from trade unions to disadvantage them during negotiations, and in some cases blatantly disregarding trade union rights, including derecognising them, while undermining environmental, and health and safety standards.(3)

Entering The Globalisation Debate: The Multilateral Agreement on Investment (MAI)

Now entering centre stage into the globalisation debate is the MAI being negotiated by the OECD. The basic concept of the Agreement is a simple one, namely that through the principles of National Treatment and Most Favoured Nation, member governments would treat foreign investors no less favourably than domestic ones. Thus, governments would still be able to implement policies to strengthen social and environmental regulation, provided those policies were not more stringent for foreign investors than for domestic ones. However, foreign investors would have the right to legal redress if a government or sub-national government were to breach these principles of non-discrimination. As will become clear though, these principles plus other elements of the proposed MAI could have far reaching consequences in some countries, where the MAI has become a controversial issue.

Ahead of the launch of the MAI negotiations at the May 1995 Ministerial Council meeting, a four year feasibility study to determine the possible contents of any emerging Agreement was conducted by the OECD Committee on International Investments and Multinational Enterprises (CIME). At the same time a political debate took place as to whether the WTO or the OECD should have competence in this area. In the event developed countries chose the OECD on the grounds that non-OECD WTO Members would probably oppose the liberalisation agenda proposed for the MAI by key G7 governments, in much the same way as they had during the Uruguay Round of negotiations over trade liberalisation. And, once agreed at the OECD, non-OECD countries would in any case be free to negotiate their accession to the MAI. This strategy would then deliver a benchmark treaty for later negotiations at the WTO.

The May 1995 Ministerial Council meeting accepted the findings of the feasibility study, which gave negotiators a largely complete agenda, and on the basis of this were given two years in which to complete the MAI. However, the completion date of May 1997 was overly optimistic, and negotiations were extended for a further twelve months by OECD Ministers. Indeed as will become clear there may yet be no MAI. To understand why this is so, it is necessary to review the contents of the draft text, and summarise the state of play of negotiations.

The OECD MAI: Key Concepts

The negotiators original aim was to agree a stringent top down treaty that would cover all economic sectors, and go far beyond the scope of the existing 1630 bilateral investment treaties (BITs) in existence today. The concept of a top down agreement is important here, as in effect all sectors not specifically excluded or subject to a national level exemption would be covered by the Agreement. This contrasts starkly with the WTO process, where only those sectors listed in an agreement would be covered by WTO provisions.

There appears to be no dispute over the definition of investment with the broadest ever agreed, including stocks and bonds (plus derivatives), real estate, in addition to direct investment. The MAI will also provide legal guarantees for both the investment itself and the making of an investment. This goes beyond most BITs, which are limited to protection of investments once they are made. Critics fear that this would increase the pressure on governments to liberalise domestic rules and regulations in key areas to head off the threat of legal action by MNEs trying to break into domestic markets. As to coverage, the "measures" which include laws, regulations and administrative practices, aim to cover all levels of government: central, federal, state, provincial and local. This is controversial, and some governments are under pressure to exempt sub-national levels of government. Indeed, the fact that Canada is a federal state where many policies are implemented at the sub-national level governing, for example, social, environmental, health and social services, has prompted the government of British Columbia to formally state its opposition to the MAI.

As noted the core concept of the MAI is non-discrimination between domestic investors and their investments, and foreign investors. This is the so called National Treatment principle. In tandem, the Most Favoured Nation principle means that once a country has accorded a given treatment to a foreign investor, or investment it must not grant less favourable treatment to any other investor or investment. These two principles will apply before and after an investment is made, that is to the "establishment, acquisition, expansion operation, management, maintenance, use, enjoyment and sale and disposition of investments." Supporters of the MAI argue that this will only create a level playing field between domestic and foreign investors. Critics argue that these measures combined with the legal guarantees for investors and their investments would in effect give MNEs considerable leverage over domestic governments. Moreover, while governments would be under no obligation to grant foreign investors more favourable treatment, this would not in effect be outlawed, as incentives to foreign investors would not be covered by the MAI. Another controversial aspect of the MAI relates to the fact that countries would also be bound by National Treatment in terms of so called performance requirements. As originally drafted this would have meant that governments could not require that foreign investors, for example, employ a minimum number of local employees, use local suppliers and their goods, take on local partners, transfer technology or achieve a given level of research and development. Responding to pressure, negotiators have now excluded from the performance requirements provisions, those relating to levels of employment, production, investment and sales. The other side of the performance requirements coin relates to discrimination in favour of domestic enterprises, whereby the National Treatment principle would prohibit the granting of government subsidies solely to domestic investors for job creation, training, research and development, regional development, and so on. Again this has proved controversial, and as a consequence it is thought (but not confirmed) that the MAI may not prohibit non trade-related performance requirements in return for government support.

The principles of National Treatment and Most Favoured Nation would explicitly apply (as currently drafted) to privatisation and subsequent transactions involving privatised assets. Equally controversial, the language at present would either prohibit special share holding arrangements, such as 'golden shares' or employee only buy outs - or would alternatively allow governments some control over privatisation arrangements. In terms of continuing public enterprises, proposed text (not agreed) provides that monopolies should not be allowed to cross-subsidise so as to artificially support services that compete with other providers, and should act "solely in accordance with commercial considerations" in the purchase or sale of monopoly goods or services.

Another core element of the MAI is the proposed dispute settlement procedure to resolve any problems that arise for investors. The MAI will allow for binding dispute settlement, not only between host and home states, but crucially (and this goes beyond the WTO) between the investor and the host state. By contrast, there is no reciprocal right for governments, or civil society in general to take investors to a dispute settlement (see below for issues related to labour and the environment). Also of concern is the process by which this will operate. In practice this means that if an investor believes that the "measures" (as set out above) of a country where it has invested, even in the pre-investment phase, are violating the provisions of the MAI, it will have the right to request that the home and host countries resolve the dispute, either through consultation or by recourse to a domestic court or tribunal, or to a free standing dispute settlement panel. The panel would consist of representatives from MAI Member countries. Alternatively, the investor itself would have the right to take a government to the free standing dispute settlement panel. Moreover, should a country be found to be in violation of the provisions of the MAI, it could be bound to change its domestic laws, regulations or administrative procedures or be subject to a non-specified fine.

OECD governments should have recognised from the outset that the provisions of the MAI would prove controversial. But, the public debate that should have accompanied the negotiations has been muted, outside of a few countries, trade unions and NGOs. Much of the blame for this lies with OECD governments themselves, who believed that a small clique of investment experts could conclude a far reaching liberalisation instrument away from the public gaze, and then communicate it to the outside world. In many respects this strategy has backfired, resulting in a growing opposition in several countries to the MAI, witness: "the intention of the MAI is not to regulate investments but to regulate governments. As such the MAI is unacceptable."(4) The OECD itself has finally admitted that: "As with all binding international agreements, this will moderate the exercise of national authority to a degree...."(5)

Responding to the MAI: TUAC And Its Affiliates

From the outset TUAC has argued that for the MAI to be a balanced multilateral agreement it must extend the same rights, including binding rights for the protection of workers and the environment, as that extended to investors and their investments. Anything less could provoke a popular backlash against globalisation, and in particular the MAI. The campaign to get meaningful labour and environmental standards into the MAI has been a long one, which is yet to be resolved to the satisfaction of both trade unions and environmental groups.

TUAC has taken a twin-track approach to the MAI during the negotiation process. The Secretariat has been mandated to achieve a 'satisfactory treatment' for labour and environment issues. Among other things this includes a binding clause, such that any government seeking to attract investment by suppressing domestic labour standards or by violating internationally recognised core workers' rights would be taken to dispute settlement. The full list of TUAC demands is as follows:

1. a forceful reference in the Preamble of the MAI in which governments affirm their support for both core labour standards and the OECD Guidelines for Multinational Enterprises;

2. the annexing of the full Guidelines to the MAI itself, and not the Final Act;

3. the establishment of National Contact Points to enforce the Guidelines, which should be a legally binding element of the Agreement for all Parties without exception;

4. the wording of the text so that non-Members acceding to the MAI would automatically adopt the Guidelines;

5. the inclusion of a binding clause in the MAI, subject to dispute settlement, such that governments would not seek to attract investment by suppressing domestic labour standards or by violating internationally recognised core workers' rights. This clause would also encompass environmental standards.

Currently governments are thought to have accepted points 1 and 2. A majority exists for accepting points 3 and 4, but Australia, Korea, Mexico and New Zealand are fiercely resisting this. The optimists within the Negotiating Group think it likely that their opposition will ultimately be overcome. That leaves point 5 concerning the binding clause. Here progress has been made and a majority of governments now favour its inclusion in the Agreement. There are however complications, and a positive settlement is thought to ultimately hinge on the US position, for the following reason. Outside of the majority in favour of a binding clause, Australia, Korea, Mexico and New Zealand have formed a blocking minority because key players, including Germany, Japan and the US currently favour a voluntary clause. But, if the US were to swing behind the binding clause then Japan and Germany would it is thought follow suit. As to the US position now, following President Clinton's inability to gain Congressional authority for the renewal of presidential Fast Track authority, a broad debate has now opened up across the government departments with an interest in this issue that could produce a shift in the Administration's position whereby the negotiators swing behind a binding clause.

At the same time TUAC has urged its affiliates to decide upon their own positions vis-Ó-vis their government and the MAI as a whole in the light of discussions over national exemptions being negotiated. Attitudes between North American and European trade unions differ as regards the Agreement, which can in part be explained by the different debates within these regions as regards economic integration and globalisation.

The North American debate has been framed by the experiences of trade unions with the North American Free Trade Agreement (NAFTA), and the Free Trade Agreement of the Americas (FTA). Trade unions in the United States and Canada have been highly critical of the effects that these agreements have had on economic integration, social welfare systems and labour standards. This experience has shaped the decision by the Canadian Labour Congress to oppose the MAI as currently drafted, on the grounds that, among other things it would challenge Canada's ability to maintain its not for profit and social services, along with measures to support Canadian culture. A debate is also currently taking place within the AFL-CIO as regards the Agreement.

On the other hand, the moves to a European Single European Market have been accompanied by a social action programme, and as importantly a social dialogue covering a broad range of economic and social measures that involves the trade unions. Through this process European unions have sought more multilateral or regional controls for example through EU legislation. The systems to deliver an inclusive dialogue and debate over the direction of European economic integration have, therefore, been put in place.

New Developments: Narrowing Liberalisation?

A new development in the MAI surrounds the national level reservations or exemptions(6) to the Agreement. It was originally proposed that the MAI would have few exemptions, either at the general level (so called carve outs) or at the national level. General exemptions would be limited to the following measures: to preserve national security including public order, to implement monetary and exchange rate policies (including IMF approved temporary measures for balance of payments problems), and prudential measures with respect to financial services. However, a general exemption now applies to taxation and social security, and a fierce debate continues on a French proposal for a general exemption covering cultural industries.

It is however the new developments over national level exemptions covering specific economic sectors and activities that could halt the liberalisation tendencies of the MAI. In line with a top down MAI, it was originally planned that national level exemptions would be few and subject to "standstill" and "rollback" procedures. The former would mean that, once a government had signed the agreement it would not be able to add further exemptions to those already lodged, nor to implement new non-conforming laws, and regulations. The latter would lock in liberalisation, as the exemptions would then be negotiated away over time.

This highly restrictive concept resulted in governments lodging in February 1997 a total of 600 pages of national level exemptions. As well as covering major sectors of economic activity, several countries lodged exemptions covering all state and provincial level activities. One government sought an exemption from the investor to state dispute settlement procedure! In response the Chair of the Negotiating Group requested new lists. But rather than submitting shorter lists, key governments requested that a new type of open-ended exemption be created. This would create two types of national exemptions. On the one hand some would be subject to "standstill and "rollback. On the other hand, governments would be free for all time to lodge exemptions covering any existing and future economic sector and activity that would not be covered by "standstill" and "rollback". Although some governments are resisting this move a debate is now taking place on how to create a limiting mechanism, such that all exemptions are not listed under the latter category. The importance of this development should not be underestimated, as it could end the MAI as a rigid top down Agreement.

Next Steps: Deal Breakers, Ratification and Implementation

The MAI negotiators will now work to conclude the Agreement ahead of the 27-28 April 1998 deadline of the OECD Ministerial Council meeting. In addition to normal Negotiating Group meetings, informal bi-lateral discussions will take place across capitals. The focus will be on whether enough of a consensus can be forged to conclude an Agreement that Ministers can agree to, or whether a framework package will be all that emerges, or that the deal breakers are so major that the MAI is either further postponed or shelved at the OECD and brought forward at a later date at the WTO. The issues that could make or break the MAI are as follows.

First and foremost would be the proposed clause on secondary boycotts. The current draft text was prepared by the European Union following an initial Canadian proposal. The intention would be to ban Parties to the Agreement (at any level of government) from imposing liabilities on investors; or to prohibit or impose sanctions on foreign investors, because of their investments in a third country. If included this would in effect outlaw measures such as the US Helms Burton Act, which allows the government to ban investors from other countries dealing with Cuba to enter the US, and to confiscate their assets. The clause would, however, also prohibit legislation along the lines of that introduced by the State of Massacheussets, where enterprises that invest in Burma have been banned from bidding for State contracts. This issue has become so contentious that discussions to resolve it have been moved away from the Negotiating Group, and a political dialogue has instead been initiated between the EU and the US Administration.

Second, many non-European governments remain opposed to the inclusion in the MAI of a Regional Economic Integration Organisation Clause (REIO). Proposed by the EU, the REIO clause would in effect exempt EU Parties to the Agreement from applying the principle of Most favoured Nation to multinationals from and operating within the EU. This would be analogous to the EU's clause in the GATT agreement that allows EU countries to set higher tariffs for non EU countries, than that afforded to EU countries trading amongst themselves. Non-EU countries are opposed to this on the grounds that it would allow EU countries to discriminate against MNEs from outside the EU.

Third, for many governments, the exclusion from the MAI of the open ended list of national level exemptions (as set out above) would be a deal breaker. Domestic pressure, including that from sub-national governments for the inclusion of such precautionary measures would make it difficult to ratify in domestic parliaments. On the other hand those governments seeking to ensure that the MAI remains a "pure" liberalisation Agreement are opposed to any weakening of its provisions.

Fourth, the issue of whether matters related to culture and cultural industries, for example domestic film industries should have a general carve out from the Agreement has become a deal breaker for some countries. Canada and France are said to be the leading proponents for such a clause in order to protect their domestic audio and visual industries as well as their language from domination by predominantly anglo saxon influences.

Compromises in these areas have been proposed, and some have been linked. Whatever the outcome of negotiations over the rest of the deal breakers, the clause on secondary boycotts remains the major stumbling block to the completion of negotiations.

Should a deal be struck to conclude the negotiations, then attention will turn to ratification and implementation. It has been envisaged that Ministers from the OECD countries plus those from non-OECD countries wishing to become initial Parties to the Agreement would sign the Final Act in Paris during the April 1998 meeting of the OECD Council of Ministers. That would not bind those governments to the Agreement, and neither would it mean that the MAI would enter into force on that day. That would only take place following the ratification of the MAI in a sufficient number of countries to make it workable, and when those Parties had met to agree a date of entry into force.

It is certain that governments would not be able to amend the MAI during its passage through domestic legislatures. It would be on a take it or leave it basis. That is why it is vital that trade unions and other progressive groups lobby for the inclusion of their demands ahead of the April 1998 OECD Council meeting. Amendments would only be allowed once the MAI has come into force and when all Parties agree to the amendment. That is why transparency would be needed on the type of national level exemptions that a government would lodge as these would be the only negotiable factor. It is also the reason why many governments have argued for the inclusion of an open ended list of such exemptions.

It is also vital that a full and frank public debate be held on the MAI within countries during the ratification process. Because, once a country has ratified the Agreement, and it is in force any investment existing at that time would be covered by the MAI for 15 years, even if the country were to withdraw from the Agreement. Furthermore, as a Party may only give notice of its withdrawal after five years, it would in effect be locked into the MAI for a total of 20 years.

Endnotes:

(1) TUAC is the Trade Union Advisory Committee to the OECD. It has consultative status with the OECD and represents 70 million workers in 55 affiliated trade union national centres in the 29 OECD Countries. Further information on TUAC and its work, including the MAI can be found by visiting its website at "http:/www.tuac.org".

(2) Werner Stumpfe, head of Gesamtmetall, Financial Times, 21 August 1996.

(3) TUAC Submission to the OECD Review (1996) of National Contact Points (NCPs). OECD Members are obliged to set up National Contact Points to deal with matters arising with the OECD Guidelines for Multinational Enterprises. For the most part national trade union centres were highly critical of the NCPs, and the non-implementation by governments, and non-adherence by MNEs to the OECD Guidelines for Multinational Enterprises.

(4) Joint NGO statement following the 27 0ctober 1997 informal consultations between the MAI Negotiating Group and 22 NGO groups. It should be pointed out that differences do exist among the NGO community as regards the MAI. Whilst many implacably oppose the MAI some have accepted the principle, subject to a balance being struck between the rights of investors, communities, workers, and the environment.

(5) OECD Policy Brief on the MAI. Number 2 - 1997.

(6) The terms reservations and exemptions are used interchangeably by the Negotiating Group to mean the same thing. For the purposes of this paper the term exemption will be used to denote the sectors/activities to be excluded from the MAI.

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