7. Foreign Investment

Background

The 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 proposed Multilateral Agreement on Investment (MAI) are like 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 favourably" than domestic firms. Although negotiations on the MAI appear to have stalled within the OECD, the draft proposal is clearly intended as the basis for any investment chapter within the Free Trade Area of the Americas (FTAA). Proponents of the MAI also want to incorporate its measures into a revision of the Trade-Related Investment Measures (TRIMs) code within the WTO.

All of these investment agreements are biased in favour of maximizing the ability of transnational investors to move freely around the globe with minimum interference from national governments or international regulatory bodies.

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

Guiding Principles

• 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.

• Regulations must be democratically determined by governments in consultation with their people.

• In the event of a conflict, internationally recognized human, labour 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 Labour Organization conventions concerning trade union freedom, collective bargaining, child labour, forced labour and workplace discrimination; the United Nations Convention for the Elimination of All Forms of Discrimination Against Women, and 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 of the Control of Trans-boundary Movements of Hazardous Wastes and their Disposal; and the Kyoto agreements on greenhouse gas emissions.

• Regulations must be agreed upon 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 labour and environmental laws in order to attract foreign investment, it would be guilty of unfair competition.

• International agreements on investment regulation must take into account the asymmetries of power and different levels of development that exist between countries.

• 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:

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

• 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;

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

• protect small, local, family and community enterprises from unfair foreign competition; and

• 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).

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 and the proposed MAI prevent national and local communities from implementing economic development policies that utilize investment for the benefit of ordinary people.

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

• 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;

• give preference to hiring local personnel;

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

• respect labour standards that are at least as high, but never lower, than those set by International Labour Organization conventions on trade union freedom, collective bargaining, child labour, forced labour and workplace discrimination against women and minority groups;

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

• fulfill international environmental treaties such as the Montreal protocol on ozone depletion or the Kyoto agreements on greenhouse gas emissions;

• achieve the transfer of appropriate technology;

• 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;

• 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 labour 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;

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

• provide incentives for the reinvestment of profits;

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

• 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.

Dispute Resolution

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.

Expropriation

The expropriation of corporate assets to serve vital community needs should be permitted. Compensation for expropriated resources shall 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.