Edwin 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
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
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
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
*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.