Investment Agreement Negotiations in the OECD
International & National Security Law Practice Group Newsletter - Volume 1, Issue 1, Fall 1996
December 1, 1996Edwin D. Williamson
Considerable progress is being made in the negotiation of a multilateral agreement on investment in the Organization for Economic Cooperation and Development. Negotiations began this fall pursuant to a mandate adopted by the Council of Ministers of the OECD in May 1995 and are scheduled to conclude in June 1997.
The goal of the negotiations is to develop a comprehensive, legally binding, multilateral agreement that will reduce the barriers to international investment based on nationality, protect investments and provide dispute settlement procedures. It is expected that the investment agreement will: contain a broad definition of "investment", prohibit discrimination against foreign investments (in the right to establishment as well as in conducting post-establishment activities) by requiring that they be given national treatment and most favored nation treatment; prohibit restrictions on the transfer of funds, including the repatriation of earnings; protect investments against expropriation without prompt, adequate and effective compensation; and establish a state of the art regime for the settlement of disputes (including investor-to-state, as well as state-to-state, arbitration).
Although the negotiations are being conducted among the 28 industrialized countries that belong to the OECD, it is expected that several developing countries will accede to the MAI.
Cross-border investments have a tremendous impact on the global economy, with both the home and the host countries benefitting. The market value of U.S. foreign direct investment abroad is estimated at over $1 trillion, and the market value of foreign-owned investments in the U.S. is estimated at just under that amount. In 1995, foreign direct investments from OECD countries increased more than 37% to $264 billion, while foreign direct investments into OECD countries increased over 50% to $210 billion. It is estimated that U.S. firms export more than $100 billion each year to their overseas affiliates, which is in stark contrast to the conventional allegation that foreign direct investments are tantamount to exporting jobs.
While the General Agreement on Trade and Tariffs and the establishment of the World Trade Organization created an extensive set of international trade rules, there is no broadly based, comprehensive, legally binding set of international rules on investment. Investment principles may be found in bilateral investment treaties ("BITs"), generally between an industrialized country and a less developed country, in regional economic integration organizations ("REIOs", such as the European Union and NAFTA), in multilateral agreements that address an aspect of international investments (such as the Trade-Related Investment Measures (or "TRIMS") agreement that came out of the Uruguay Round of the GATT negotiations) and in voluntary codes of behavior. There is not, however, a comprehensive, legally binding agreement among the industrialized countries, which account for over 80% of international investment.
In May 1995, the Council of Ministers of the OECD mandated the negotiation of a multilateral agreement on investment (the "MAI") that would "provide a broad multilateral framework for international investment with high standards for the liberalization of investment regimes and investment protection and with effective dispute settlement procedures".
Pursuant to the Ministers' mandate, negotiations on the MAI began last fall. The chairman of the negotiating group (the "Negotiating Group") is Franz Engering of the Netherlands. One of the two vice chairmen is Alan Larson, Assistant Secretary of State for Economics and Business of the U.S. Department of State.
The international business sector's official conduit to the Negotiating Group is the Business and Industry Advisory Council to the OECD ("BIAC"), and the U.S. Council for International Business, the U.S. affiliate of BIAC, represents the views of the U.S. business community. BIAC has established an MAI expert group to assist the Negotiating Group in addressing key issues in the MAI negotiations.
Issues that have arisen in the MAI negotiations include whether the principle of nondiscrimination should apply to the establishment of an investment or only to an investment after it has been established and how much parties should be required to "liberalize" (i.e., remove barriers) prior to becoming parties. Exceptions to the nondiscrimination principle that are controversial are the "cultural" exception pushed by the French and the Canadians in particular and the national security exception, which has been complicated by the controversy over Helms-Burton.
Issues in the dispute settlement area include the question of what remedies an arbitration panel should be empowered to impose, with suggestions ranging from monetary damages only to specific performance and a requirement that the offending measure be removed. A somewhat related issue is what sanctions a party should be permitted to impose on another party which does not comply with its obligations under the MAI or which does not enforce arbitral awards against it, with the suggestions ranging from no prescriptions or proscriptions regarding sanctions, which is the approach traditionally taken in trade disputes, to a prohibition on any sanctions against an existing investment.
The subject of the movement of key personnel raises some potentially emotional immigration issues. Some fear that expanded freedom in this area could be used as a means of importing cheaper labor.
It is generally conceded that the issues of whether, or under what conditions, monopolies and incentives should be allowed to exist and whether, or how, privatizations should be implemented are too complicated for an agreement establishing international investment principles. Therefore, it is likely that the MAI will only require that there be no discrimination based on nationality in determining who is permitted to own a monopoly, who may receive an investment incentive or who may participate as an investor in a privatization.
It is expected that the MAI will apply to both sub-federal entities (e.g., the States of the United States) and supranational entities (e.g., the European Union). While these issues are not controversial within the Negotiating Group, they could be within such entities.
To date, attempts to address such non-investment issues as environmental and labor standards have been relatively limited. There are, however, indications, that "green" (i.e., environmental) and "blue" (i.e., labor) interests are paying more attention to the negotiations and will attempt to insert requirements in the MAI that these matters be addressed in connection with investment decisions.
The establishment of a "parties group" or some other sub-ministerial body to oversee the operation of the MAI is being discussed. The OECD Secretariat, which is not directly negotiating the MAI, but which is providing staff support, is seen as pushing for a relatively extensive role for some such body, particularly in interpreting the MAI. Such a move is being resisted by those who see the establishment of strong investor-to-state dispute settlement procedures as a significant reduction in the role of governments in international investments.
Perhaps the most profound controversy in the MAI negotiations is the extent to which the MAI should cover taxes. The issue is important to the integrity of the MAI, because it is only too obvious that a discriminatory investment regime can as easily be effected by tax measures as by direct measures. Withholding taxes imposed on non-residents are not simply the economic equivalent of an income tax imposed on residents, but rather represent a different way (quantitatively and qualitatively) to tax non-nationals. Different withholding rates can give investors of one country an advantage over investors of another.
Governments are understandably reluctant to agree to any restriction on their abilities to raise revenue. Further, the vast and complex network of bilateral tax treaties provides the basis for addressing tax issues between countries, although those treaties are more concerned with double taxation than investment issues. Most governments, especially those which belong to the OECD, have very sophisticated tribunals for the settlement of tax disputes and are reluctant to subject their tax disputes to another forum, such as an arbitration panel. Finally, the most favored nation requirement in the MAI would result in the ratcheting down of withholding tax rates to the lowest rate existing among the parties to the MAI. Because several OECD members have negotiated zero rates among themselves, subjecting withholding rates to the MFN clause of the MAI would, in effect, eliminate withholding taxes. Purists would argue that this is a desirable result, because withholding taxes distort investment practices.
As a result of these factors, governments have traditionally opposed subjecting tax measures to the disciplines of investment treaties. The issue is exceedingly complicated technically and politically. As a result, as a practical matter, it would be virtually impossible to resolve this issue in the MAI time frame. Therefore, it is unlikely that the MAI will cover direct taxes in any significant way, but indirect taxes will probably be covered. I expect that the OECD Council of Ministers, when it convenes next spring to consider the MAI, will adopt some sort of mandate for the continued study of the elimination of tax measures that distort investment practices.
Timetable for the MAI
Negotiations on the framework of the MAI are scheduled to be completed this calendar year. Once that is completed, the hard negotiating over reservations and exceptions will begin. The goal is to have an MAI that the OECD Council of Ministers can approve at its meeting in June 1997. If such approval occurs, the MAI would then be opened for signature.
The OECD has a fairly extensive program for bringing non-member countries into the MAI dialogue, not as negotiators, but as observers. The hope is that a number of the "dynamic" non-OECD developing countries will accede to the MAI.
In the United States, very little attention has been paid to the MAI in the Congress or at high levels of the Clinton administration. After the November elections, it is expected that this will change somewhat. Congressional approval of the entry by the United States into an MAI will probably take the form of legislation, rather than having the Senate give its advice and consent through the treaty process.
*Edwin D. Williamson, the Chairman of the Federalist Society's International and National Security Law Practice Group, is a partner in Sullivan & Cromwell's Washington, D.C. office. He is serving as chairman of BIAC's expert group that is assisting the MAI negotiations.