The Multilateral Agreement on Investment
Are the fears justified?

by Peter Hilpold 

Während die Befürworter das Abkommen als notwendigen Baustein in einem globalen Wirtschaftssystem sehen, fürchten die Kritiker eine unzulässige Machtfülle von internationalen Konzernen ebenso wie eine Verelendung der „Dritten Welt". Zu diesen Kritikern gehören auch 15 Südtiroler Verbände und Organisationen, die vermuten, daß sich dann ausländische Investoren „die Rosinen aus der heimischen Industrie, Landwirtschaft und dem Gastgewerbe herauspicken". In einem offenen Brief an die Landesregierung, den Landtag und an die Europäische Akademie warnen sie vor einem „Ausverkauf der Heimat".

In seinem Bericht erläutert Dr. Peter Hilpold, wissenschaftlicher Assistent an der juristischen Fakultät der Universität Innsbruck und Mitarbeiter im Bereich „Minderheiten und regionale Autonomien", Hintergründe und Entwicklung des umstrittenen Abkommens und will damit einen Beitrag zur aktuellen Diskussion liefern. Der Text gibt die Meinung des Autors wider.

Since September 1995 negotiations have been underway to draft the framework of a new Multilateral Agreement on Investment (MAI) 1 which should set high standards for the admission and the effective protection of foreign investment.
Standard-setting of this kind requires high levels of technical knowledge and usually takes place - at least in the preliminary stage - in the inner circle of experts from international organisations. When a draft of the proposed agreement was presented to Tony Clarke, a Canadian political scientist, this gave way to the first negative reactions and in a very short period of time outright opposition to the agreement showed up. In the meantime it is impressive to notice how broad the ranks of the opposition have grown, with protest manifestations in the capitals but also in the province under way. It seems, therefore, appropriate to examine briefly the underlying issues in order to see if the allegations have any real substance.

2. Investment in a globalised world

In order to grasp the importance of a Multilateral Agreement on Investment it should be noticed that in the last decades direct investment has grown far more rapidly than world trade. Between 1973 and 1996 the amount of world wide direct investment has risen from 25 billion to 350 billion US dollars while world trade has risen from 575 billion to 5,100 billion US dollars . It is estimated that about 44,000 holdings with 280,000 subsidiaries are operating on an international level. Increasingly also corporations from developing countries and - even more - from emerging countries are operating internationally. It is therefore far too simplistic to portray the investment liberalisation issue as a game in which the antagonists are grouped with the Western industrialised countries on the one side and the developing and emerging countries on the other. On the contrary: the latter group has come to realise that investment is an outstanding instrument of development.

While some decades ago a lot of developing countries tried to go a "third way", assuming hostile behaviour against foreign companies or even proceeding to outright expropriatory measures, this attitude has nearly totally changed since then. In the end, an actual competition among developing countries for foreign direct investment set in. However, the most important part of foreign direct investment happens between industrialised countries and these countries are also the primary target for the proposed agreement. It is not only a mere coincidence that the drafting of the Multilateral Agreement on Investment takes place in the OECD. In fact, while it is fair to say that investments in the OECD-countries, once they have been made, are sufficiently protected, investment liberalisation, as it is understood by the Multilateral Agreement on Investment, comprises a far wider approach.
The MAI purports to protect foreign investment of any kind in the host state not only once the investment has taken place but also in the so-called pre-investment phase.

Therefore not only established foreign-owned or controlled enterprises will find protection under this agreement but also investors who intend to enter into a foreign market. This entails granting non-discriminatory treatment in the investment admission procedures which are typically highly regulated areas. But the investment concept of the Multilateral Agreement extends further to encompass investment in intangible assets and even portfolio investment. Highly disputed is the question of up to which point investment incentives should be granted on a non-discriminatory basis to all investors from the contracting parties as well as the problem of what role the non-discrimination principle should play in the privatisation process of state enterprises. Other, highly topical agendas are the entry, stay and work of investors and key personnel, the prohibition of nationality requirements for senior management positions and the prohibition of certain performance requirements in the actual activity of the enterprise.

Already this short and uncompleted list of content shows that the Multilateral Investment Agreement cannot be caricaturised as a device aimed at altering the economic relations between industrialised and developing countries in a manner which would be advantageous for the former. It is rather the complexity of modern investment activities that requires the drafting of new rules which would apply also - if not primarily - between industrialised countries.

3. A brief outline of international investment rules

The treatment of property owned by foreigners for a long time has been considered of central importance in international law. Given the comparatively small amount of international intercourse, the treatment of foreigners (and, respectively, the treatment of their property) has been a focal point on which the development of essential concepts of international law - if not the degree of instititutionalisation of the world community itself - could be measured.
In ancient times foreigners were - together with their property - at the mercy of the host State. The necessities of commercial relations made sure, however, that traders were often granted far-reaching liberties. Beginning in the middle of the 18th century, it was assumed in legal literature that the admission of a foreigner involved the obligation for the host state to protect the alien together with his property. The basis for this obligation was found in part in natural law, in part in the fact that the property of the foreigner was seen as an element of the national wealth of his home state and therefore required protection on an international level. It may have been this kind of legal reasoning in a very unequally structured international society that led to a situation in which, in the 19th century, foreign property benefited generally from a very high level of protection.

A first major challenge to this rule came with the Russian Revolution of the year 1917, when "national treatment" of expropriated foreigners lost all its meaning as nationals could be expropriated without the payment of any compensation. In order to counter this new danger a minimum standard of compensation was defined on an international level and opposed to the national treatment rule. The best-known definition of this minimum standard - which is still the most extensive one in scope - was made by the United States Secretary of State Cordell Hull, who in 1938, confronted with the expropriation of United States property in Mexico, required "prompt, adequate and effective compensation".
After 1945 the Hull-formula was repeatedly accused, especially by the newly independent states, as not being an adequate expression of the international minimum standard. The last occasion when something like a compromise was found between industrialised countries and the developing world was the UN General Assembly Resolution 1803(XVII) of December 14, 1962 on Permanent Sovereignty over Natural Resources, which, by requiring the payment of "appropriate compensation in accordance with the rules in force in the State taking such measures in the exercise of its sovereignty and in accordance with international law", still gave real substance to the minimum standard and - though somewhat ambiguously - limited the discretional powers of the State by linking it to the international rules. This linkage is no longer present in the resolution on Permanent Sovereignty over Natural Resources of 1973 (UN GA Res. 3171(XXVIII)). In Art. 2(2) of the Charter of Economic Rights and Duties of 1974 (UN GA Res. 3281 (XXIX)) we finally find a formula according to which "appropriate compensation should be paid by the State adopting such measures, taking into account its relevant laws and regulations and all circumstances that the State considers pertinent." A State which does not know any protection of property in the worst case would not be obliged to grant any protection for the expropriation of foreign interests. In the voting procedures Western industrialised countries showed abstention or even outright opposition to these new rules and therefore these provisions cannot be seen as the expression of a new opinio juris in this area.

Also the developing countries showed no real change in their behaviour. They continued to pay compensation for expropriated foreign property, even though the amount was often below the Hull-standard, especially when larger nationalisation programmes were underway. An ever-increasing number of developing countries is also entering into bilateral agreement on investment protection. The last occasion in which the existence of a minimum standard on an international level was confirmed on a large scale was (or is, as the procedures are still ongoing) within the jurisprudence of the Iran-United States Claims Tribunal.
In short, we are now confronted with a situation in which the existence of a minimum standard for a compensation obligation in the case of expropriatory measures can no longer be contested. The extent of this obligation, however, is still somewhat blurred. On the other hand, we have several bilateral investment treaties which lay down very high standards of protection but are expression of special regimes which cannot be generalised. There can be no doubt that a multilateral investment protection agreement would simplify this situation considerably and reduce the transaction costs in this area (for example with regard to the negotiating process, the dispute settlement procedures or other compliance measures) in a very consistent measure.

As far as can be seen the need to protect foreign property and investment is no more contested. The developing countries are the least interested in re-opening this discussion which brought so much uncertainty, augmented the risks for investors and thereby led to higher financing costs and relented the developing process. The really tricky question therefore is not whether foreign investment should be protected but in which way this ought to happen.

4. What are the critical issues with the Multilateral Investment Agreement?

Having established that the need for investment protection cannot be really an issue and keeping in mind the fact that many aspects are still under consideration on the negotiating table, one has to wonder why this proposed agreement has met with so much resistance. Some of the main points made by the critics shall be briefly discussed here.
First of all it has been said that liberalising the international rules on investment would be conducive to social problems and further environmental degradation, as this would lead to a "race to the bottom", especially among developing countries. The OECD-negotiators did not turn a blind eye to this issue. In fact, the draft presently under consideration refers explicitly to these problems and requires the TNCs of the future contracting parties to respect the specific guidelines that have been elaborated within the OECD. The "race to the bottom" mentioned above shall be explicitly prohibited. Further rules are under consideration. It cannot be denied that it will be rather difficult to draft binding rules in this area. For several decades attempts have been made to find binding rules in order to regulate the behaviour of multinational enterprises. This issue has turned out to be a far more complex one than initially thought. In fact, the way from rules intended to ensure that national public order is respected to measures which are discriminatory, potentially expropriatory (for example in the sense that compulsory transfer of technology is often required) or a disguised protectionist instrument has proved to be a very short one. In the meantime many developing countries, having noticed the beneficial influence the activity of TNCs exercises on the development of their economies, have adopted a far more friendlier approach. By and large it has been recognised that only on the basis of non-discriminatory treatment investment by TNCs is available.
Of course, the TNCs are an economic and social phenomenon that requires close scrutiny and especially when they gain sufficient power to side-step national regulations in their host state the drafting of special rules aimed at maintaining public order has to be considered. It doesn't seem, however, that this thorny issue, which has not yet been fully analysed, can be solved through special provision in the Multilateral Agreement on Investment. The most reasonable way to try to solve the problems mentioned would be to continue the pertinent discussion in the fora instituted specifically for this agenda.
It is interesting to notice that the real problems with the MAI hardly get any consideration in the manifestations against this agreement. Because of limits of space they can only be briefly summarised.
First of all it has to be questioned if a separate MAI is useful at all when the WTO is increasingly becoming the most important international economic institution built on a broad consensus. It is true that in the last negotiating round the investment issue has played only a marginal role and specific provisions have been adopted only insofar as they are trade-relevant .
Nonetheless, the launching of a new negotiating round is already under consideration and there the investment agenda would surely play a more prominent role than in the past. On the other hand, this does not mean that the MAI negotiations are a superfluous loss of energy. The WTO has proved to be very efficient in integrating provisions created in other fora.
Another, widely neglected problem is the interrelation of investment issues with taxation aspects, which, for the moment, are mainly regulated on the basis of bilateral conventions drafted on the basis of OECD model conventions. At the moment, taxation is considered only in a very rudimentary way in the Multilateral Agreement on Investment.
A further very problematic question is if it is appropriate to allow for very broad general and specific exception and safeguard rules, for example for the preservation of public order, for health and sanitary reasons or for cultural issues2. An all too liberal drafting of these rules could seriously endanger the effectiveness of the new rules.
Other problems regard the relationship of the MAI towards other bilateral treaties aimed at the protection of investment and the question of the application of extraterritorial investment law.

5. Conclusion

For reasons of space it was only possible to give a very brief outline of a highly complex subject.
The information provided should, however, suffice to show that the problems with this agreement lay in other areas than an often not well-informed public discussion would suggest.
If the preservation and further development of economic and social welfare is still a desirable goal then investment protection is a desirable instrument to obtain this objective. In economic literature it has been shown that the guarantee of property rights is one of the most important conditions for economic development. However, whether the MAI in its present form is the appropriate instrument to ensure these property rights, is open to discussion. This discussion, however, should take place in a less emotional setting and be based on more informed arguments. In fact, many protest manifestations against the MAI resemble other manifestations against the WTO which were largely based on allegations without substantial basis.
On the other hand, it cannot be denied that institutions like the WTO and the OECD also bear some responsibility for these events. One has to notice an astonishing lack of transparency in the negotiating process. Transparency, however, will become ever more important if highly complicated international rules are to find the approval of the people in the various participating countries 2 . This approval will also be ultimately decisive for the efficacy of the various international instruments.

Dr. Peter Hilpold, researcher in the section "Minorities and regional autonomies" at the European Academy and assistant lecturer at the Faculty of law, University of Innsbruck

Notes:

1 Some considerations can be made on the designation of this agreement, having in mind that in other languages than German far more importance is attributed to acronyms. A title for this agreement in a more fluent English would have been (and for a certain period of time actually was) "Multilateral Investment Agreement". The corresponding acronym would, however, have been MIA, which is already used in the US to designate soldiers "missing in action", especially those from the Vietnam war (see on this aspect U. Häde, Der völkerrechtliche Schutz von Direktinvestitionen im Ausland, in: 35 Archiv des Völkerrechts 2/1997, S. 181-212). Therefore the word order was changed allowing for new word plays. While in German speaking countries, the question was raised if there would be MAI-agreement in may (Mai), in Italy some hinted that this agreement would never (never = mai in Italian) come into life.

2 On this issue see also P. Hilpold, Die EU im GATT/WTO-System – Aspekte einer Beziehung sui generis, Peter Lang-Verlag 1998, about 400 pages.