Select Committee on Trade and Industry Third Report


APPENDIX 11

Memorandum submitted by Friends of the Earth

1.  SUMMARY

  1.1  Friends of the Earth (FOE) approves of the curtailment of the OECD's MAI negotiations. The MAI focused solely on liberalisation and had the potential to harm the recipients of foreign investment, by removing their sovereign rights to direct the development of their economies and control the use of their natural resources. The MAI also threatened to undermine international environmental law and initiatives designed to promote local economies and culture.

  1.2  FOE recommends that the UK Government oppose the introduction of any new negotiations to liberalise foreign investments, in the World Trade Organisation (WTO) or in any other forum, on the basis that no further multilateral liberalisation of investments is necessary at present; because multisector negotiations within the WTO could put many economies under a great deal of pressure to sign up an inappropriate agreement; and because the WTO is even less likely than the OECD to take account of environmental and social concerns.

  1.3  FOE believes that the UK Government should take a lead in initiating alternative negotiations on a Multilateral Agreement to Regulate Investment and Investors (MARII). FOE believes that there are sound economic reasons for doing this; and that such a move would generate worldwide support from civil society.

  1.4  Finally, FOE believes that the UK's Government and Parliament should review their respective procedures concerning notification, monitoring and ratification of multilateral economic agreements, with a view to improving the transparency of negotiations and the validity of final agreements.

2.  FRIENDS OF THE EARTH (FOE)

  2.1  Friends of the Earth International (FOEI) is a campaigning organisation dedicated to the protection of the environment and the promotion of sustainable societies, FOEI is a federation of 58 autonomous FOE member groups, based in developed, developing and transitional economies around the world. FOEI's Trade, Environment and Sustainability (TES) Programme was established in 1992 to examine the impact of trade policy on peoples' environment and quality of life and to develop genuinely international policies in response. To this end the TES Programme is jointly co-ordinated by FOE groups in England, Wales and Northern Ireland; Ghana; the Philippines; the United States and Uruguay.

  2.2  As part of the TES Programme's activities, FOE England, Wales and Northen Ireland, FOE United States and the FOE International Secretariat have co-ordinated FOEI's anti-MAI campaign over the last two years. This has involved frequent lobbying of both participating and non-participating governments and the OECD Secretariat; and the production and world-wide distribution of analytical and lobbying materials. FOE has also been at the heart of the global anti-MAI coalition, co-hosting the meeting at which the coalition was established and helping to establish the internet list-servers used by the coalition.

3.  THE COLLAPSE OF THE MULTILATERAL AGREEMENT ON INVESTMENT

  3.1  In May 1995, members of the Organisation for Economic Cooperation and Development (OECD) proposed the establishment of a treaty, the Multilateral Agreement on Investment (MAI), to liberalise international investments in and between member states and other signatories. However, due to political differences between negotiating parties and vehement opposition from citizens around the world, the MAI negotiations ground to a halt in October 1998, when the French Government withdrew its support for the treaty.

  On the basis of a number of statements from different parties, including the UK's Department of Trade and Industry, FOE believes that the OECD's MAI negotiations have finally been abandoned:

    "The Minister for Trade, Brian Wilson, today said that a successful conclusion to the MAI negotiation is most unlikely in the near future" (Brian Wilson Voices Support for New Rules on Investment, Department of Trade and Industry press release, 21 October 1998).

    "The Government signalled its withdrawal of support for a controversial global treaty on foreign investment yesterday. Trade minister Brian Wilson said the draft Multilateral Agreement on Investment, designed to protect business investing abroad, should be abandoned." (The Guardian, 30 October 1998).

  3.2  FOE recognises the potential value of a binding international agreement governing foreign investment. The OECD's MAI proposal, however, focused solely on liberalisation and had the potential to harm the recipients of foreign investment, by curtailing their sovereign rights to direct the development and promote the stability of their economies; and control the use of their natural resources. The MAI also threatened to undermine international environmental law and initiatives designed to promote local economies and culture (see Section 4 below for details).

  3.3  FOE consistently opposed the continuation of OECD negotiations to establish an MAI, on the basis that the MAI could not be reformed to address FOE's concerns. The MAI text focused on maximising liberalisation and minimising regulation, for the purpose of short-term financial gain; and the extremely weak Chairman's Proposals on Environment and Related Matters and on Labour (Annex 2 of the MAI negotiating text, dated 24 April 1998) served only to demonstrate that the political will necessary for radical reform was almost entirely absent. Consequently, FOE fully supports the curtailment of the OECD's MAI negotiations.

  3.4  However, FOE is concerned that various participating countries now wish to move the MAI negotiations to the World Trade Organisation and to push for MAI-type clauses in other international agreements (bilateral and plurilateral trade agreements, for example). Brian Wilson of the Department of Trade and Industry, Lionel Jospin, the French Prime Minister, and Sir Leon Brittan, the EU's Trade Commissioner have all voiced their support for the transfer of talks to the WTO.

  3.4.1  FOE believes that such a development would be a serious error. Superficially, the WTO would appear to be more a inclusive forum and one that might take account of developing country concerns. However, based on past experience (particularly during the GATT's Uruguay Round of negotiations), it seems highly likely that weaker members of the WTO will be put under a great deal of pressure to (a) agree reluctantly to negotiations on investment that are either free-standing or part of a multisector Millennium Round agenda; and (b) then sign up to an investment agreement that is not in their interests.

  3.4.2  Pressure to sign up to an investment agreement would probably be intense for two reasons. Firstly, negotiations on foreign investment would probably be presented as a quid pro quo for increased access to developed country markets (the European agricultural market for example). Secondly, it is likely that any such agreement would have to be agreed to by the entire WTO membership as is normal practice. As a result, those countries least likely to benefit from opening their markets (ie the smallest and weakest) would find themselves under great pressure from those countries likely to benefit substantially (countries with considerable political clout).

4.  THE MAI—A FLAWED PROPOSAL

  4.1  This section analyses the MAI as was. This analysis has been retained in our evidence in order to:

    —  fulfil the explicit requirements of this inquiry (which was established prior to the collapse of the MAI);

    —  identify those features that would define any proposed investment treaty as an "MAI-type" treaty; and

    —  establish what should not be in any future investment agreement.

  4.2  We have deliberately included evidence relating to both the environmental and developmental aspects of the MAI, even though the Environmental Audit Committee is also examining the MAI. This is because a healthy environment, a stable and sustainable economy; and equity are all critical elements of a sustainable society. They should not be looked at in isolation; and FOE does not campaign on them in isolation.

  4.3  The MAI proposal was based on an assumption that FOE disagrees with: that extensive liberalisation, based on the theory of comparative advantage, is compatible with the development of heathly, sustainable economies. In our experience it is not. Many members of FOE international spend the majority of their time dealing with the environmental and social impacts of overconsumption and increased imports and exports (deteriorating commodity prices; devastated ecosystems; farming, fishing and newly developed domestic sectors unable to compete with foreign companies).

  4.4  Furthermore, the theory of comparative advantage has been debunked because it assumes, incorrectly, that capital does not cross borders. Capital is in fact highly mobile and is not necessarily invested in the most efficient domestic sector. Rather, it moves across borders to more efficient sectors in other countries as it seeks out the highest returns. As a result countries actually compete on the basis of absolute advantage and some may lose out altogether, creating great economic uncertainty and instability all round. Since the MAI would have increased capital mobility it would also have increased this instability.

  4.5  The MAI and economic stability. Economic stability is an inherent feature of sustainable development. However, whilst the MAI might have increased stability and predictability for foreign investors, it could have decreased economic stability from the nation states' point of view, by increasing the quantity and speed of international capital transactions; worsening host countries' balance of payments; reducing the range and effect of tools traditionally used to control and develop national economies; and reducing levels of natural capital. The knock-on effects of such destabilising forces would be felt most severely in developing economies. FOE believes that this approach is unnecessary: increased investor confidence and subsequent investment in sustainable development in developing countries could be achieved without the level of liberalisation and deregulation proposed in the MAI.

  4.6  Investors' rights and responsibilities. The MAI's principal flaw was that it sought to boost investor confidence by increasing foreign investors' rights without imposing commensurate responsibilities. This could have seriously undermined national efforts to promote environmentally and economically sound development. For example, a government might have been obliged to offer unprecedented access to scarce natural resources to a foreign investor, yet not have been able to require that investor to operate to its own highest standards. The proposal to annex the currently weak and non-binding OECD Guidelines on Multinational Enterprises would have done little to redress this fundamental imbalance. The current review of the Guidelines would not have improved matters since no radical changes to the Guidelines have been proposed by governments.

  4.7  Participation and accession of developing countries. The exclusion of developing countries from negotiations; suggestions that the MAI might have become a must-have "seal of approval" for investment; the suspicion that non-OECD countries could have found it difficult to negotiate exemptions; and the provision for any founding member to reject the "application" of any acceding party (the provision on non-applicability, Article XII), all indicated that the MAI could have worked to the advantage of "founding" OECD countries and the disadvantage of non-OECD countries. This suspicion was bolstered by the fact that the few non-OECD countries that had been present during the MAI negotiations as observers had their request to join as founding members turned down. The Department for International Development (DFID)'s report on "The Development Implications of the Multilateral Agreement on Investment" (also known as the Fitzgerald Report) completely failed to acknowledge the above concerns and FOE still believes that it should be withdrawn.

  4.8  Environmental standards and performance requirements. The MAI proposal prohibited the use of a range of performance requirements that can be used to promote the sustainable development of economies, particularly in developing countries (local employment, domestic content and certain technology transfer requirements, for example). It also threatened to undermine any environmental, health or other standards that could be deemed to be discriminatory. Experience with the North American Free Trade Agreement (NAFTA) has shown that genuine environmental standards have already been challenged and discarded in response to similar pressures (see 4.9.1 Expropriation).

  4.9  Expropriation. The broad definition of expropriation in the MAI could have allowed challenges to environmental and other regulations on the grounds of lost profit (or even potential lost profit). The MAI's definition of expropriation was based on similar usage in the NAFTA agreement, which has since given rise to a number of challenges to environmental legislation in Canada and Mexico. Such challenges include ths US-based Ethyl Corporation's claim that Ottawa's restrictions on a fuel additive, MMT, caused them to lose profits and reputation valued at US$251 million (Ottawa eventually agreed to pay US$13 million and removed the restrictions). More recently, another American company that specialises in the clean-up of hazardous waste, S D Myers, has claimed losses of C$10 million due to Ottawa's ban on the export of polychlorinated biphenyls (PCBs). This case is still pending, although the export ban has already been lifted.

  4.10  A proposal to amend the MAI negotiating text to prevent contries from lowering standards fell short of what was required, since it appeared only to apply to specific investments. It is unlikely that it would have prevented a general lowering of environmental and other standards to attract investments.

  4.11  Local Authorities. It seems likely that local authorities could have found their ability to use discriminatory measures to promote local economies and protect local environments severely constrained by the MAI. Additional problems could have arisen if a local authority's action was not supported at the national level since its national government would have been required to defend the local authority's action. This has already happened in Mexico, with a US company, Metalclad, challenging the Mexican Government over waste-disposal restrictions imposed by a Mexican local authority (case still pending). In the UK, where foreign multinationals already wield considerable influence as providers of services and employment, this issue has caused considerable concern. As of August 1998, the Local Government Association and more than 20 local authorities, alerted by NGOs, had investigated and published reports or passed resolutions expressing their concerns about the MAI (these included Birmingham City Council, Oxfordshire County Council and Bournemouth Borough Council). A similar number had investigations under way.

  4.12  Multilateral Environmental Agreements. The potential conflict between the MAI and various hard-won multilateral environmental agreements (MEAs) has been a major concern. The MAI's National Treatment, Most Favoured Nation and Performance Requirement clauses could have come into conflict with MEAs that are specifically designed to restrict access to resources and/or are likely to rely on discrimination between nations in order to achieve their ends.

  4.12.1  The Convention on Biological Diversity (CBD), for example, gives "countries of origin" the right to control access to genetic resources and requires the benefits of such access to be shared "in a fair and equitable way" (Article 15). Since levels of access are determined in a manner that discriminates between countries (that is, they are based on levels of transfer of biotechnology by various governments), the CBD would probably have been in direct conflict with the MAI.

  4.12.2  Similarly, the Climate Change Convention's Kyoto Protocol would have been at risk, since its Clean Development Mechanism (which allows resource transfer funds to be allocated to local but not transnational companies) and the provision for a system of tradeable permits, which excludes non-signatories, could be considered discriminatory measures.

  4.12.3  The UN Convention on the Law of the Sea (UNCLOS). The MAI would also have conflicted with the rights of states under UNCLOS, which deals with the highly charged issue of access to fish stocks. MAI negotiators knew that this was a particularly sensitive issue and some countries, including the UK, were negotiating exemptions for their fishing industries.

  4.13  Transparency. The secretive manner in which MAI negotiations took place rightly fuelled mistrust in the MAI. Whilst national-level consultations in the UK improved over the course of the negotiations, more could have been done (see 5.4, Recommendations).

  4.14  Dispute settlement. As with NAFTA, the dispute settlement process envisaged in the MAI proposal would have allowed investors to sue governments. There was no corresponding process for citizens' organisations or local authorities; and national governments would have had to defend any restrictions imposed by local authorities. The threat of costly legal action by powerful, well-resourced multinationals could have been enough to deter both local and national authorities from introducing any MAI-inconsistent legislation.

5.  FRIENDS OF THE EARTH'S RECOMMENDATIONS

  5.1  The UK Government should oppose the introduction of any new negotiations to liberalise foreign investments, in the World Trade Organisation or in any other forum.

  5.1.1  FOE knows of no convincing evidence to suggest that further multilateral liberalisation of foreign investments is either necessary or likely to be beneficial to host countries. In fact, capital mobility has played such a significant part in bringing about a global economic crisis that reregulation rather than deregulation now seems to be called for. In addition, reaction to the MAI has shown that a broad cross-section of civil society is adamantly opposed to further liberalisation; there is no public support for further negotiations.

  5.1.2  WTO negotiations to liberalise foreign investment might be more democratic and inclusive than OECD negotiations: but they will not be sufficiently democratic—and they may be too inclusive. FOE believes that there is a significant likelihood that many poorer and less developed countries (who would never have considered acceding to the OECD's MAI) and even some of the larger developing nations could be put under intense pressure to negotiate and sign a WTO agreement on investments that could be damaging to their economies.

  5.1.3  The WTO has an appalling record on the inclusion of social and environmental concerns and is most unlikely to be able to address many of the criticisms that were levelled at the MAI.

  5.2  The UK Government should review the extent to which MAI-type trade and investment liberalisation clauses are being incorporated into other trade and aid agreements; and reverse this trend. For example, the European Union's review of the Lome Convention and the International Monetary Fund's recent attempts to change its Articles of Association have both been linked to attempts by rich countries to open up new investment markets.

  5.3  The UK Government should initiate a Multilateral Agreement to Regulate Investors and Investments (MARII).

  5.3.1  FOE believes that the time is right to take a new tack and begin negotiations to regulate the activities of both foreign investment and investors. There is an economic need for it; and widespread public support.

  5.3.2  Such an agreement should:

    —  have as its objective the promotion of sustainable societies with stable economies;

    —  be based on and explicitly refer to internationally agreed principles on equity, the environment, development, human rights, labour and health and safety;

    —  safeguard locally important small-scale economic activity;

    —  prevent inward investment that could undermine national development needs and control speculative short-term flows of capital in and out of countries;

    —  contain mechanisms that permit governments to control the activities of transnational corporations;

    —  be binding and have an effective and inclusive enforcement mechanism; and

    —  be negotiated in a transparent manner, with the involvement of all stakeholders.

  Such an agreement would be a valuable contribution to the development of sustainable and equitable societies, since it would help to put people before profits; promote subsidiarity; and restore sovereignty and democratic control.

  5.3.3  FOE notes with interest that Peter Mandelson, the Secretary of State for Trade and Industry, has stated that:

    "We [the British Government] are firmly committed to the principle of regulating businesses locally, nationally and, where necessary, internationally in order to protect the environment, promote improved labour standards and encourage sustainable development." (letter to the Rt Hon David Curry MP, 31 July 1998).

  5.4  The UK Government should review its procedures for dealing with multilateral economic agreements. In particular, all such agreements should be automatically subject to independent reviews on environment, development, consumer and corporate issues, human rights and labour standards; ongoing scrutiny by a Cabinet-level committee; and consultation, not only with citizens' organisations, but with Regional Assemblies, Regional Development Agencies and local authorities.

  5.5  The UK Parliament should review Parliamentary procedures for monitoring multilateral negotiations and ratifying subsequent agreements. Procedures should be introduced that allow early notification and monitoring to take place; and to ensure that all multilateral environmental agreements, even those negotiated by the European Commission, are subject to Parliamentary ratification.

26 October 1998


 
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