GLOBAL ECONOMICS


Kathleen Macmillan and Patrick Grady
The Return of the MAI
from Seattle and Beyond: the WTO Millenium Round(1999), Chapter 8.

The Spectre at the Table

Our research has yielded no support to rumours that federal trade negotiators gather at sundown to thrust pins into voodoo dolls bearing a resemblance to Maude Barlow, Chairperson of the Council of Canadians. But there is no denying that the rift between the prospective deal-makers and the representatives of "civil society" is vaster when it comes to trade and investment than it is for any other area.

Despite the resounding defeat of the MAI initiative, WTO members, in a fit of masochism, have indicated a willingness to consider negotiations on investment in the upcoming Millennium round. It would be an overstatement to say that the support for including investment in the next round of negotiations is lukewarm at best. Even the U.S., which is widely credited with championing the "corporate agenda" on foreign investment, has signaled that it considers it an open question whether a modest package on investment could be included in the WTO talks. Clearly, the objective is to tread carefully in this mine-infested area.

If talks do proceed, negotiators can expect spirited opposition worldwide from non-governmental organizations who are buoyed by their self-proclaimed success in killing the MAI. Any progress on the investment file will depend on winning over these powerful opponents a difficult challenge indeed. It will also mean crafting a deal that will bridge the interests of developing countries intent on clearer rules to protect foreign investors with the desire of developing country members to resist the prospect of foreign domination.

The Links Between Investment and Trade

Global stocks of foreign direct investment (FDI) reached $US 3.5 trillion in 1997, a 23 percent increase over the previous year. Increases in FDI have significantly outpaced the growth in international trade in recent years.

Foreign investment has rather a bad reputation in certain circles. It conjures up visions of greedy young men in red suspenders creating havoc for developing nations. Notwithstanding the exhortations of Malaysian President Mahandur, however, foreign investment flows are an essential facet of today's business environment. In a world of transnational organizations, strategic firm alliances and world product mandates, investment policy can matter as much or more than trade policy. Foreign investment leads to the transfer of technology, ideas and best practices between global enterprises. It increases wealth and employment and acts as a conduit for the transfer of goods and services. It provides a way to access foreign markets in spite of trade barriers.

Groups like the Council of Canadians have made a name for themselves preaching against the evils of foreign investment. The fact is that foreign capital has been an essential part of Canada's economic achievements since our very beginning as a fur and fish trading nation. It has paved the way for many of our industrial successes, not the least of which is motor vehicle production, our number one sector in terms of employment and trade. Far from making us beholden to foreign masters, inward foreign direct investment has contributed importantly to our strength and independence as a major economic power.

Preferring to portray Canada as the perennial victim though, the Council of Canadians would rather ignore the fact that Canada is now a net exporter of investment capital worldwide. In 1997, the stock of FDI in Canada was estimated to be $188 billion, less than the $194 billion Canadians invested abroad. This subtle but significant shift reflects our coming of age as a economic player and underlines the critical links that bind us to the global economy.

Bombardier's success in foreign markets provides an excellent illustration of how outward investment can benefit Canadians. Bombardier has grown from its origins in a small Quebec town to a world leader in the field of transportation. It now ranks as the third largest civil aerospace manufacturer in the world, the second largest manufacturer of passenger rail and mass transit car equipment and a global leader in the recreational products area with its highly successful Sea-Doo and Ski-Doo vehicles. More than 90 percent of the companies revenues of over $11 billion are generated in markets outside of Canada. Significantly, 42 percent of its 50,000 employees are located in Canada.

Investment in foreign markets has been central to Bombardier's strategic success. The company now operates plants in 12 countries. Establishing a local market presence has been particularly important in the mass transit business because of local requirements for a customized product and procurement practices favouring domestic suppliers. Foreign investment has permitted Bombardier to sell a Canadian product to foreign markets, generating jobs here at home.

The Case for Multilateral Rules on Investment

Critics of negotiations on trade and investment maintain that it is all part of an underhanded plot by multinationals to force their corporate agenda on unsuspecting governments. Clearly, international standards proscribing what is fair and not fair when dealing with foreign investors would help the business community. What is less apparent, but equally compelling, are the gains that would flow to developing nations and to taxpaying citizens the world over from a liberalized investment regime.

First, the corporate agenda. Most multinational companies can provide chapter and verse on investment restrictions encountered in international markets. The obstacles can be as seemingly innocuous as the measures instituted by developed nations to restrict foreign ownership in strategic sectors like broadcasting, banking or resource development. In the developing world, foreign investors can be outrightly prohibited, forced into joint ventures with local firms or coerced into dealings with local authorities that lead to the transfer of funds, technical expertise or a variety of other favours.

One common scenario is something like the following: an exporter of manufactured goods is told that in return for access to a foreign market, it must establish a commercial presence there. In addition to the costs of constructing and operating a plant that might well be superfluous to its business needs, the company has to put up with many capricious demands from local authorities. To address domestic concerns over foreign investment, it is told that the plant must be established in a specific location, in partnership with a local business person and that it must employ local contractors and engineers and purchase its materials from local suppliers. Even with these conditions met, the investor is not home free. It faces a constant threat of expropriation.

Foreign investment restrictions increase costs for businesses. The costs are both out of pocket and the costs that come from delays, uncertainty and from the inefficiencies that arise from building smaller than optimal plants in less than desirable locations and operating them according to somebody else's rules. Multinational companies have come to accept restrictive investment regimes and work around them. Many have employees whose sole task is to understand and provide what makes domestic officials happy. Sadly, once they reach this point, multinationals can become advocates for the retention of investment restrictions as a means of keeping competitors out of their favourite markets. This, more than anything, should convince us of the need for a liberalized investment regime.

Stronger rules governing trade and investment might not be all gravy for the business community. One area where multinational corporations won't be leading the charge for reform is in the area of investment incentives. As taxpayers we shake our heads at the way companies shop from jurisdiction to jurisdiction looking for the most generous package of tax breaks, grants and other hand-outs when deciding where to locate a plant. Japanese car manufacturers are adept at squeezing every last goodie out of states, provinces and municipalities when contemplating the construction of factories in North America. New Brunswick's own Frank McKenna was renowned for his tendency to pull out the cheque book whenever he got into a conversation with business interests, even within hearing of his fellow Premiers when on Team Canada trade missions in Asia.

When governments pay companies to locate in their jurisdiction, it costs the taxpayer money and it makes poor economic sense. Quite often, these businesses fall short of achieving their true potential because they were enticed somewhere where the business fundamentals just don't add up. They ultimately pay a price in terms of competitiveness which costs the economy as a whole.

But the benefits to developed countries like Canada of a freer investment regime pale in comparison to the advantages that would flow to the developing world. An open and predictable climate for investment would bring needed capital and know-how to developing countries.

Evidence strongly supports the fact that FDI improves wages and living standards, particularly in low income nations. Foreign investment provides one of the best means for disadvantaged nations to better their economic circumstances.

President Mahandur of Malaysia was quite wrong in blaming foreign investors like George Soros for his country's financial crisis. His real problem lay much closer to home. If investors have more certainty that local regimes would not yield to drastic measures like capital controls and expropriation during times of economic hardship, they would be much more inclined to keep their capital in place and weather the economic storm. This provides far better insurance than exchange controls and other restrictions do in averting an economic crisis.

It is exactly for these reasons that the IMF and World Bank, in the wake of the recent Asian Crisis, are encouraging countries to liberalize their investment restrictions as a condition for assistance.

Canada's Investment Agreements with Other Countries

Largely unnoticed in the spectacular interest surrounding the MAI is the fact that Canada has already signed onto a number of investment agreements. In addition to the NAFTA provisions governing investment contained in Chapter 11 of the Agreement, Canada has bilateral Foreign Investment Protection Agreements (FIPAs) with over twenty countries.

CANADA'S BILATERAL FIPA PARTNERS
PolandArgentinaHungary
Costa RicaUSSRUkraine
PhilippinesBarbadosVenezuela
EgyptArmeniLatvia
Trinidad & TobagoEcuadorPanama
ThailandSouth AfricaCroatia
UruguayRomaniaLebanon
Czech & Slovak Republics

The NAFTA Chapter 11 and FIPA provisions are more or less the same. All contain the following key elements:

Canada has negotiated special treatment for sensitive sectors in these agreements. We are able to implement policies in the cultural, social, health and education field that might otherwise run afoul of the commitments made in NAFTA Chapter 11.

FIPAs may provide Canadian investors protection, but their geographic coverage is far from complete. There are 135 members of the WTO, yet we only have twenty-two agreements. Simple mathematics reveals why bilateral agreements are a cumbersome and imperfect substitute for a multilateral agreement. Full coverage for all the WTO countries would require 9,045 separate treaties when one would suffice. Creates a lot of work for negotiators though.

WTO Investment Rules

Investment rules also form part of existing WTO agreements. The Agreement on Trade-Related Investment Measures (TRIMs) prohibits some performance requirements (such as domestic sourcing and export restrictions) in some goods-producing industries. The Agreement on Trade and Services provides for the "right of establishment" for foreign service providers wanting to establish a commercial presence and commits Canada and other WTO members to provide non-discriminatory treatment to specified service industries. Coverage of the TRIMs and GATS Agreements is limited to only certain sectors, however. In the case of the latter, only service sectors where countries have made commitments are subject to disciplines.

Clearly, Canada has already made far-reaching commitments in the investment area, particularly with respect to U.S. investors under the NAFTA. If we have already given away the store to U.S. investors, why does the prospect of an investment pact with other WTO members cause such concern? One would think that the payoff, in terms of gaining easier access for our investors to foreign markets, is greatest in the multilateral arena.

The MAI Debacle

Negotiations aimed at reaching a Multilateral Agreement on Investment were launched in the Organisation for Economic Co-operation and Development (OECD) in 1995. The OECD, which is a 31-member association for developed nations, proposed that the MAI be a free-standing agreement open to both OECD and non-OECD members. The objective was to achieve a comprehensive framework providing high standards for liberalization and investment protection and a system for resolving disputes.

It did not take long for members of the NGO community to zero in on what the OECD was up to. Web sites were established, fund raising drives launched and book deals signed. Groups such as our own inimitable Council of Canadians proclaimed that negotiators were creating a bill of rights for multinational corporations. The result, they maintained, was that governments would be powerless to set their own social, environmental, cultural and health policy without challenge from foreign companies. The horror stories and scare tactics were spectacular and, quite often, blatantly false.

Unfortunately, in an area as complex as investment finance, the patriotic message of those opposed prevailed over the more complicated but reasoned arguments of the advocates. There really was no contest. Canadians were convinced that Maude Barlow loves her country more than do our captains of industry and trade policy officials.

It is an interesting question, though, whether Maude and the crowd really did defeat the MAI. Their self-congratulations aside, there is ample reason to believe that the MAI was doomed even without their interventions.

In the first place, the forum was all wrong. Sure, it is usually easier to reach an agreement on just about anything among "like-minded" countries of the OECD but investment is different. The truth is that investors from OECD nations don't have trouble doing business in other OECD nations. The difficulties lie elsewhere, notably in the developing world. Consequently, there was no real upside to an investment pact among rich nations, at least not enough to put up with the heat inflicted by opponents to the MAI back at home. Better to wait until there is an agreement worth fighting over.

Second, indications are that MAI negotiations got bogged down over other substantive issues. A concern arose over the ability of member nations of the European Union to maintain autonomy in the negotiations. France, for example, shared Canada's interest in safeguarding culture and wanted to strike out on its own in this area.

It's not clear whether governments have learned anything from the MAI fiasco. They certainly are keeping a low profile on upcoming negotiations. This is smart. The last thing they need is to spook domestic opponents into generating a groundswell of resistance so early on. The success of the entire Millennium Round depends on keeping domestic constituencies on side and committed to the benefits of trade liberalization.

A "Wish-List" for a Multilateral Pact

With the MAI defeat so fresh in our minds, what is the best strategy for success in the Millennium Round? The answer lies in aiming for the achievable. The focus should be on the big prize: a pact with developing country members and their implicit recognition that foreign investment is a positive force in helping them to realize their economic goals.

As such, a multilateral investment agreement should do little more than affirm the principles of national treatment, transparency and most-favoured-nation. Indications are that developing countries are most resistant to granting "rights of establishment" to foreign multinationals. This is understandable given their history of domination by the East India and Chiquita companies of the world. Hence, it might be most realistic to limit ourselves to rules governing the treatment of existing investors in this round of negotiations. Disciplines on the use of performance requirements would be also desirable as would some code of conduct in cases of expropriation. Assurances will have to be provided with respect to the sovereignty of member governments in sensitive areas such as environmental, cultural and social policy.

Investment is one area where the WTO can act in concert with its two Bretton Woods sisters in advancing the interests of the developing world. The IMF and World Bank can play an important role in convincing developing nations of the folly of measures such as exchange and capital controls. There is no reason why the WTO should be left taking all the heat on the trade and investment file.

Another element that would be desirable to include as part of a multilateral investment pact is a set of disciplines governing the granting of investment incentives. Taxpayers the world over would rejoice if their governments would agree to cease and desist in the bidding war game to give away money to corporations. While the likelihood of ever achieving meaningful multilateral disciplines on investment incentives in this round is just about nil, it shouldn't stop us from continuing to ask our corporations and governments for rules in this area in the hope that they might finally see the light.

Canada is poorly suited to claim a leadership role in negotiations on investment incentives. We have strongly resisted any attempts to have provinces and municipalities bound by multilateral commitments and it is at this level where most investment incentives are granted. We have been spectacularly unsuccessful in effectively curtailing their use, even within our own federation. Notwithstanding disciplines in the Agreement on Internal Trade, provinces continue to open their pocketbooks to almost any call centre that comes calling. That is why multilateral agreements are so important. They save countries from costly mistakes made by their governments.

Investor-State: Are the Critics Right?

Most of what the critics say about investment pacts are dead wrong. They might be on to something in their criticism of investor-state dispute settlement, however. It is conspicuously absent from our wish-list of desirable provisions for a multilateral pact as it is from the Japanese and European negotiating positions on investment.

Under the investor-state obligations of NAFTA's Chapter 11 and Canada's FIPA bilaterals, foreign investors who believe that a government regulation or policy has reduced the value of their investment are entitled to "sue" the government for compensation.

One of the most interesting investor-state cases is the NAFTA challenge brought by The Loewen Group Inc., a Canadian-based funeral home and cemetery business, against the U.S. government in late1998. The claim seeks compensation for a $500 million jury verdict in Mississippi in an earlier breech of contract case. Loewen was effectively prevented from appealing the Mississippi case because of requirements to post a $625 million bond a condition it considered excessive and punitive. The company is maintaining that it was subjected to "discrimination, denial of the minimum standard of treatment guaranteed by NAFTA and uncompensated expropriation, all in violation of NAFTA."

Loewen's quest aside, there are a couple of problems with investor-state provisions that trouble even the most hardened free-traders. The first is that they can undermine a government's sovereignty to conduct legitimate domestic policy and regulatory initiatives. As such, they can end up undoing exemptions negotiated as part of trade agreements in areas such as social and environmental policy.

As an illustration, consider the case of environmental policy which the NAFTA gave member governments wide latitude to pursue. This freedom means very little if governments are obliged to compensate foreign investors whenever a regulatory measure reduces the value of their investment. This is exactly what happened when U.S.-based Ethyl Corporation undertook a NAFTA Chapter 11 challenge of the Canadian government's decision to ban a manganese-based gasoline additive for environmental reasons. The Canadian government ended up settling with Ethyl Corp. for a reported $250 million in July 1998 when it became evident that we would lose the case.

The other big problem with investor-state provisions is that they treat foreign investors better than domestic investors. Most countries in the developing world safeguard the rights of investors in situations of expropriation by providing compensation at market rates. Very few jurisdictions formally extend the same privilege to investors who retain ownership of their property but suffer a reduction in its value because of government action.

Negotiators might be well-advised to tread carefully in the area of investor-state when crafting multilateral rules on investment. Developing countries might find these rules particularly hard to swallow, especially since they already make policy-makers in the developed world uneasy.

Whither Goest Investment?

Who really knows what the on-again-off-again investment negotiations will generate by way of a multilateral pact? Member countries are understandably reluctant to show their hand at this stage for fear of igniting the fires of opposition back at home. Despite their coyness, expectations are that negotiations will proceed as part of the next round of negotiations. Member countries of the WTO know that success in the trade and investment area is important to continuing the momentum of liberalization, given the tremendous interplay between capital and trade flows in today's global economy.

The chances of success in the Millennium Round depend on keeping expectations in check. The best outcome would be a deal that includes developing countries, however modest its contents. Successive rounds can tackle the harder elements such as universal rights of establishment and curbs on investment incentives. In light of these humble expectations, Canada should have little trouble safeguarding its sensitive sectors like culture, especially since our concerns in this area are shared by other WTO members. By all rights, investment negotiations ought to give critics like the Council of Canadians little to bay about. But that won't stop them from campaigning bitterly against any agreement, thus ensuring that negotiations on investment will be one of the most eventful in the upcoming round.