TUAC Briefing Note - February 1997


Over the past decade Foreign Direct Investment (FDI) has grown more than twice as fast as world trade and four times as fast as domestic production. It is driving the process of globalisation of production. This growth has been encouraged by technological change, government policies to encourage and attract FDI, regional economic integration through the European Union, and agreements such as NAFTA and the conclusion of many bilateral investment treaties.

The bulk of FDI takes place within the OECD area - some 85 per cent of outflows and 65 per cent of inflows. For the past two years OECD countries have been negotiating a Multilateral Agreement on Investment (MAI). It is now likely that the May 1997 OECD Ministerial Council meeting will endorse the outcome of these negotiations. When subsequently ratified by national parliaments, it will be open to accession by non-OECD member countries whose share in global FDI is growing. The MAI is also likely to set the framework for negotiations on investment liberalisation within the World Trade Organisation.

The MAI will bring together the current patchwork of bilateral and regional investment treaties that exist in the OECD area into a single agreement protecting foreign investors rights. Under the MAI governments will be obliged to treat multinational enterprises not less favourably than they would domestic firms (the National Treatment principle). They must also extend any favourable treatment offered to one investor to all (the Most Favoured Nation principle). Discriminatory regulations governing issues such as domestic context, export requirements, profit repatriation and the like will be forbidden. In cases of privatisation governments will have to offer shares to foreign investors on the same terms as to domestic investors.

The Agreement will go beyond manufacturing to also cover the services sector, which is currently not covered by the WTO. It will be backed up by a binding disputes settlement procedure, in which investors and not just governments will be able to take complaints to an arbitration process. Investment related to "national security" will be excluded from the MAI. Financial flows will be included but there will be exception clauses allowing governments to take temporary action to restrict foreign investments for balance of payments or monetary policy reasons. Another exception to the coverage of the MAI is taxation which has been "carved out" of the Agreement.

As would be expected, business groups and BIAC have been strongly supporting the MAI. Environmental NGO's have strongly opposed it on the grounds that it would make it harder to control multinational enterprises, who they argue are destroying the environment. Developing countries and development NGO's have also been strongly suspicious of the MAI, feeling that its terms will subsequently be imposed on them in possible future WTO negotiations.

The fact that all OECD countries have been able to progress so far with the negotiations indicates that very few member countries any longer view discriminatory controls against multinationals or foreign investors as a practical policy tool in general. On the contrary, countries and regions appear to be competing with each other to try to attract foreign investment through a range of incentives.

Against this background TUAC has been campaigning for the agreement not just to protect investors rights but to include the protection of the rights of labour and working conditions. Indeed this has been our position since before the current negotiations began, when discussions were still focused on a "wider investment instrument" in the OECD.

To achieve this we have called for the incorporation of the OECD Guidelines for Multinational Enterprises into the MAI so that the increased rights of investors are counterbalanced by obligations on their behaviour towards their workforce and host countries. We have also supported the inclusion of a labour clause in the MAI and a similar approach to environmental issues.

This is a key part of the broader international trade union campaign to include the protection of core labour standards in international trade and investment agreements and the WTO.

Negotiations on the treatment of labour issues in the MAI are now at a crucial stage. Between now and May 1997 OECD governments must make political choices on whether there is a strong linkage between the MAI and the OECD Guidelines for Multinational Enterprises as well as on a "labour clause" in the MAI itself. This briefing note sets out what TUAC believes would be a positive treatment of labour issues. National pressure from affiliates on their governments is crucially important to achieve this at the present time.

What does TUAC want ?

Throughout the negotiations on the MAI TUAC has argued that the conclusion of a simple liberalisation agreement which guarantees investors' rights but does nothing to protect workers' rights or working conditions will be perceived as unfair and imbalanced. Four mutually supportive elements have therefore been proposed for treating labour issues :

the incorporation of the OECD Guidelines for Multinational Enterprises into the MAI through an extended reference in the Agreement's Preamble and the annexing of the full text of the Guidelines to the MAI;
the incorporation into the MAI of the legal obligations on governments to set up National Contact Points to implement the Guidelines;
a commitment in the Preamble of the MAI by governments to protect, enhance and enforce basic workers' rights;
a specific provision in the MAI by which governments would undertake not to seek to attract foreign investment by suppressing domestic labour standards or by violating internationally recognised core workers' rights (this would be analogous to Article 1114 of the NAFTA on the environment).

The OECD Guidelines for Multinational Enterprises(1)

What is their role ?

The OECD Guidelines are one part of the 1976 Declaration of the OECD on International Investment and Multinational Enterprises. They are addressed to multinational enterprises operating in OECD countries. Other parts of the Declaration were addressed to governments and covered national treatment by governments of foreign investors, conflicting requirements on investors by different countries and international investment incentives and disincentives. These latter parts from the Declaration form the core of the MAI.

Although voluntary, the Guidelines have moral weight as they express OECD governments' collective expectations concerning the behaviour and activities of multinational enterprises. They have also been supported by the employers' organisations affiliated to the Business and Industry Advisory Committee (BIAC) to the OECD as well as by TUAC. Although written over twenty years ago the Chapter in the Guidelines on Employment and Industrial Relations represents a clear statement of good industrial relations practice which is of relevance today.

When adopted the Guidelines were seen as an essential part of a balanced package of measures to facilitate direct investment among OECD Members and beyond. Their rationale was that "internationally agreed guidelines can help to prevent misunderstandings and build an atmosphere of confidence and predictability among business, labour and governments(2)." The 1981 OECD Council Decision (restated in the 1991 Second Revision Council Decision) obliging Members to set up a National Contact Point to deal with matters relating to the Guidelines was a move to create an implementation and promotion mechanism. TUAC's main criticism of the Guidelines has been the lack of attention paid in recent years by governments to the follow-up.

The Guidelines are unique among the international instruments governing the activities of MNEs, in that they cover the full range of enterprise operations, separate chapters deal with: general policies, information disclosure, competition, financing taxation, employment and industrial relations, environment and science and technology.

Against a background of globalisation the potential importance of the Guidelines is greater now even than it was at the time of their adoption twenty years ago. There is a clear need to give a renewed impetus to the implementation and promotion of the Guidelines. This is recognised by the OECD itself in its Report on Trade, Employment and Labour Standards which stated "The OECD Guidelines on Multinational Enterprises have a role to play as a voluntary instrument to promote reasonable behaviour by MNEs. This role would be enhanced if home and host countries make it known that they expect foreign investors to follow the Guidelines world-wide and if non-Member countries were encouraged to endorse the Guidelines. ... This would send a clear message of the importance OECD governments attach to the respect of these standards."

What is the link to the Multilateral Agreement on Investment ?

The MAI will effectively transform the national treatment instrument within the 1976 Declaration into a legally binding multilateral agreement, guaranteeing the rights of foreign investors. Its follow-up procedures will move from the OECD to a new "Parties Group".

The incorporation of the Guidelines would be necessary to maintain the balance of approach to FDI. Moreover, opening up the MAI to non-OECD countries who would take part in the "Parties Group" reinforces this requirement.

The coverage of the Guidelines goes much further than industrial relations, to include environmental protection, competition policy, science and technology, taxation, etc.. These agreed common standards are complementary to investment rules and help equalise competitive opportunities for foreign owned and domestic firms alike. Again these are complementary to the corporate policies pursued by some leading multinational enterprises. In this sense adherence to the provisions of the Guidelines by MNEs would act as a "quality label", and at the same time could complement the individual codes of conduct which an increasing number of MNEs have started to introduce following pressure from trade unions and NGO's.

Would this change the legal nature of the Guidelines ?

No. TUAC accepts that in current circumstances it would not be realistic to make the Guidelines into a legal instrument at OECD level. The preamble and annex to a treaty are not legal parts of the treaty. The Council Decision to establish National Contact Points already is a legal commitment and should be part of the Agreement.

Would "incorporation" make a difference ?

Yes. The MAI will become the focal point of the treatment of international investment. Incorporating the Guidelines into the MAI and its follow-up procedures would highlight them in such a way as to assist their implementation. Without their incorporation the Guidelines risk being forgotten in the OECD machinery. Making the Decision on National Contact Points part of the MAI could reinforce their role as a monitoring and enforcement mechanism of the Guidelines and a monitoring body on international investment more generally.

Would incorporation of the Guidelines deter non-Member countries from becoming signatories to the MAI ?

No. The Guidelines put obligations on foreign investors to behave as good "corporate citizens". The Guidelines cover environmental protection, competition policy, science and technology, and taxation as well as industrial relations. Their incorporation in the MAI should increase its attractiveness to non-Member countries. It would also help developing countries achieve balance in the eventual discussions in the WTO.

The need for a labour clause in the MAI

The OECD Guidelines are a parallel instrument to the ILO Tripartite Declaration on Multinational Enterprises and Social Policy which are also not legally binding, and contain elements that are included in several ILO "core" Conventions on fundamental workers' rights. However, the Guidelines are addressed to multinational enterprises, not governments. Moreover, whilst covering the core standards of freedom of association and collective bargaining, they do not cover explicitly the other core labour standards identified by the ILO.

It is therefore proposed that governments in the Preamble of the MAI should commit themselves to protecting, enhancing and enforcing basic workers' rights. Moreover a specific labour clause should be added whereby governments would undertake not to seek to attract foreign investment by violating internationally recognised core workers' rights. This is akin to Article 1114 in NAFTA on environmental standards although referring to international as opposed to domestic standards.

TUAC has proposed the following language to the Negotiating Group for an MAI clause: "The Parties recognise that it is inappropriate to encourage inward investment by domestic practice or legislation that violates internationally recognised core labour standards covering:- freedom of association, right to collective bargaining, non-discrimination in employment, forced and prison labour and exploitation of child labour. Accordingly a Party shall not waive or derogate from, or offer to waive or derogate from such core standards as an encouragement for the establishment, acquisition, expansion, or retention in its territory of an investment or an investor."

Such a clause would help in combatting violation of core labour standards in, for example, export processing zones.

Current state of the negotiations (February 1997)

Over the course of the MAI negotiations TUAC has had a series of informal consultations with Negotiating Group members and formal consultations with the CIME. Labour issues began to be addressed by the Negotiating Group in the period since September 1996. At the December 1996 meeting of the Group, the Chair (the Netherlands) "concluded that a clear majority was in favour of addressing labour matters in the MAI through a package of provisions", based on "three pillars" namely:- a preamble statement; a provision stating that "Parties should not weaken domestic core labour standards in an effort to encourage foreign investment"; and association of the Guidelines. However, several delegations argued against including any provisions on labour standards in the MAI as these were dealt with by the ILO.

Negotiations on these issues are now at a crucial point. As at the Singapore WTO Ministerial discussion on labour standards, OECD countries represent a spectrum of views with the United States, France and Belgium arguing in favour of a "strong" treatment of labour issues, and New Zealand, Australia, the UK, Korea, and Japan at the other end of the spectrum arguing against the inclusion of a labour clause and only a weak reference to the Guidelines.

The United States and Netherlands have been asked to produce draft text on the labour clause. The Negotiating Group will discuss this, the exact text for the preamble, and the exact form of "association" with the Guidelines at their meetings in the last week of February and again in the last week of March, although negotiations may go beyond this.

Whilst there are signs that the Chairman's "three pillars" approach does have considerable support, there remains great uncertainty as to how strongly the issues will be treated.

Conclusion : the need for action

It is essential that affiliates contact or recontact their governments as soon as possible to urge them to support a "strong" treatment of labour issues in the MAI. (A list of key officials was sent to you with the TUAC circular of 10 January 1997). Without a satisfactory treatment of labour issues, many working people will feel that a further protection of investors rights without obligations on investors to be "good corporate citizens" will be unfair. There may well be a reaction against ratification of an eventual MAI in many national parliaments.

A satisfactory treatment must involve :

a forceful reference in the Preamble of the MAI in which governments affirm their support for both core labour standards and the Guidelines;
the annexing of the full Guidelines to the MAI itself;
the establishment of National Contact Points to enforce the Guidelines which should be a legally binding element of the Agreement;
the wording of the text so that non-Members acceding to the MAI would automatically adopt the Guidelines;
the inclusion of a "labour clause" as part of the MAI which makes explicit reference to core labour standards along the lines of that drafted by TUAC, namely: "The Parties recognise that it is inappropriate to encourage inward investment by domestic practice or legislation that violates internationally recognised core labour standards covering:- freedom of association, right to collective bargaining, non-discrimination in employment, forced and prison labour and exploitation of child labour. Accordingly a Party shall not waive or derogate from, or offer to waive or derogate from such core standards as an encouragement for the establishment, acquisition, expansion, or retention in its territory of an investment or an investor.";
the transfer of the follow-up process for labour issues to the "Parties Group" that will handle the MAI, with the same consultative procedures that currently exist for TUAC and BIAC in the OECD CIME process.

TUAC accepts that following the conclusion of the MAI, the Guidelines may need to be revised, but only in a limited number of areas:- reference to core labour standards and strengthening of the Environment Chapter and Competition Policy Chapter. It is also important that the OECD and the CIME continue to broaden its agenda irrespective of the shift of part of the work to the Parties Group. TUAC has submitted proposals for research in the area of FDI and labour standards.

A meeting of the TUAC Working Group on Global Trade and Investment will be convened on 27 March in Paris, at the same time as the MAI Negotiating Group.

(1) For a full description of the Guidelines see the 1994 OECD Report "The OECD Guidelines for Multinational Entreprises" available from both TUAC and the OECD.

(2) OECD Report on Trade, Employment and labour Standards 1996.

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