Investor Rights or Citizens Rights

The Dangerous Expansion of NAFTA Investor Protections Through the FTAA and WTO

Many people would be surprised to learn that their government has, in many ways, given up its sovereign right to pass laws protecting citizens’ health, the environment, and labor rights. They would likely be more surprised to find out that the wheels are in motion to enact trade agreements that further threaten democracy by granting additional rights to giant multinational corporations (MNCs). This, however, is the frightening reality underlying trade agreements that are currently being negotiated. If multinational corporations succeed, new investment agreements under the World Trade Organization (WTO) and the proposed Free Trade Area of the Americas (FTAA) will ensure that democracy is further eroded in exchange for corporate profit maximization.

It is not surprising, however, that the average citizen is not aware that the current situation is unfolding. This is no accident. The negotiations are undemocratic, they lack transparency, and they are being conducted without input from the very citizens whose lives will be affected. It is ultimately in the interest of MNCs to hasten the progress of such negotiations without interference from civil society, as such propositions would likely be met with strong resistance in the face of a public dialogue.

The Growth of Foreign Investments

Foreign direct investment (FDI) is one of the most politically sensitive ‘trade’ issues, as it involves foreigners exercising control over national assets and resources through investment. When a company closes a factory in the U.S. and moves it to China to take advantage of cheap labor, it is investing in China. The expansion of this FDI in the global economy has reached an unprecedented level. In 2001 more than 65,000 transnational corporations had expanded FDI through the creation of more than 850,000 foreign affiliates. That companies invest in foreign production is good, as long as they do it in ways that respect local laws and benefit local development. Not unexpectedly, MNCs have been actively lobbying governments to ensure that agreements are included under both the FTAA and WTO to strengthen the rights of investors at the expense of the rights of citizens.

Investment agreements currently proposed under the WTO and FTAA will greatly restrict the ability of governments to implement national policies for development and poverty reduction - the same policies that were used by the industrialized countries to develop. Furthermore, such agreements conflict with the 1962 UN Resolution on Permanent Sovereignty over National Resources, whose mandate is to regulate foreign investment by recognizing the state’s permanent sovereignty over natural wealth and resources as a key component to the right of self-determination.

Investment Agreements: Following in the Footsteps of NAFTA

Investment agreements under the FTAA have been drafted to model the North American Free Trade Agreement (NAFTA). WTO negotiators from rich countries, including the U.S. and the European Union, are pursuing investment protections under the WTO according to a similar model. Much like NAFTA, an agreement of this type will be designed to maximize the rights of foreign investors while minimizing the authority and rights of governments to pursue policies crucial to their national interest.

The rich countries are pushing to include a package of “New Issues” that are not currently in the WTO, that include investment, government procurement, competition policy, and trade facilitation. If successful, these New Issues will spell the end of the role of government in setting any policies to regulate foreign capital within the national boundaries. If this becomes a reality, the scope of protected capital will be expanded to include portfolio investments, short-term capital flows, and real estate.

Preventing Opportunities for Development

Proponents of establishing investor protections under the WTO are pushing for binding rules that would allow foreign investors to enter countries without conditions or regulations, and to be granted “national treatment”. If granted national treatment, foreign investors must be treated no differently than domestic investors. If such agreements become a reality, developing countries will be prevented from taking the very same actions that developed countries took in their early stages of industrialization. Specifically, they will be prohibited from providing tax incentives, targeted subsidies, and purchasing contracts to developing industries so that they can compete against foreign firms. Because of the natural advantages the MNCs have as large experienced firms, the predictable result of such disastrous policies will be unfair preferences for foreign investors.

Outlawing Performance Requirements

Performance requirements, crucial for meeting development goals, will also be prohibited if such agreements are established. Developing countries will lose the ability to demand use of local materials, local labor, and demand technology transfer, which stimulate growth in the local economy. Additionally, the improvement of environmental and labor standards will be nearly impossible as countries will be pressured to compete in a “race to the bottom”. This will particularly prove true if, as under NAFTA, governments are prohibited from screening investors on the basis of such criteria as worker compensation or environmental standards.

Investor Rights Over Citizen Rights

Perhaps most alarming are the provisions that would model those in NAFTA’s Chapter 11. Under NAFTA’s Chapter 11, governments are prohibited from passing laws which adversely affect the business of foreign investors, regardless of the role that such legislation would have in meeting national social and development goals. In the event that such legislation negatively affects the profits of a multinational corporation, individual companies have the right to sue the foreign government in a secret NAFTA tribunal - bypassing the national courts. If the corporation wins, the accused government must then compensate the corporation in the amount of profits they claim to have lost - including hypothetical profits that they claim they would have made twenty years into the future! This confers new rights on MNCs that neither domestic companies nor citizens - who have to obey national laws - enjoy. It creates a class of “supercitizenship” for foreign corporations at the expense of citizen sovereignty.

Multinational Corporations in Action

In 1999, Methanex, a Canadian corporation that produces the gasoline additive, methanol, sued the U.S. government for $970 million. The lawsuit arose following a California ban on the substance after studies confirmed that it was leaking into the ground water, causing cancer in the population. Under NAFTA’s Chapter 11, Methanex Corporation claimed that California’s ban constituted a “confiscation” of its property and was “tantamount to expropriation” - a violation of Methanex’s rights as investors. The case was brought in front of a NAFTA tribunal whose proceedings are closed to the public. As of July 2003, the case was still pending. If Methanex prevails, American taxpayers will be forced to pay the corporation $970 million for the right of California lawmakers to protect the very health of its citizens - or change the law. Such a ruling will have a chilling effect of deterring lawmakers from enacting future laws to protect the public if they conflict with the interests of large corporations. There are 14 such cases under NAFTA, and each case so far has been decided in favor of the corporation.

Wheels in Motion: Moving Towards Multilateral Investment Agreements

In spite of promises made by developed countries to focus the agenda at the WTO Cancun ministerial on development issues, rich countries instead lobbied heavily to expand the WTO by adding a new agreement on investment. The effects of developing such an investment agreement would be disastrous for the welfare of people and the environment in both developed and developing countries, as legislators will lose the sovereign right to pursue policies that puts the public interest above corporate interests.

Resisting Corporate Domination

Many developing countries expressed their opposition to bringing new investment issues to the Cancun ministerial of the WTO in September 2003. It was clear during the negotiations that rich countries employed strong-arm tactics to attempt to force the introduction of the investment issue despite clear opposition. However, on the last day of the ministerial, large groups of developing countries came together and voiced their total opposition to the launching of new negotiations on investment and other New Issues. This strong coalition of diverse developing countries maintained solidarity to oppose the rich countries’ agenda, and scored a clear victory for democracy and the poor in Cancun. It is imperative that developing countries continue to oppose the launching of investment negotiations in the WTO, and that citizens continue to hold their representatives accountable.

Alternative Proposals

Developing countries must retain the autonomy to pursue strategies that ensure that foreign investment contributes in a positive manner to the realization of national goals. Additionally, developed countries should pursue trade positions that will benefit the public welfare rather than the bottom line of a few large multinational corporations. To this end, binding obligations on investors should be instituted to ensure that they behave in a manner that is consistent with international human rights and development objectives. A fair and equitable trade agreement would include measures to counter corporate predatory business practices, anti-labor policies, and environmental degradation. Finally, in order to make corporations more accountable, enforceable international standards should be established for the reporting and disclosure of information.

Eight years of experience with the WTO has shown that it is still dominated by the interests of rich countries and elite businesses around the world. It’s time for a fundamental review of the WTO’s impact, and to scale down or abolish and replace the WTO with a completely different institution. Furthermore, an alternative to the FTAA draft currently being negotiated must be developed so that issues of social justice are not subordinated to corporate interests. Strengthening the rights of investors will do little to benefit working people in either developing or rich countries. On the contrary, an agreement of this nature will benefit corporate interests at the expense of ordinary citizens.