The Failure of the MAI, What's Next?
Author: Pernille, Griselda, Marlene
I. Introduction
Developing countries often consider foreign direct investment (FDI) as an engine to boost economic growth. Therefore, they try to promote investment inflow by various means. One approach is to offer investment guarantees to foreign investors using Bilateral Investment Treaties (BITs). BITs guarantee foreign investors the same rights as domestic investors and contain rules on international arbitrage. Capital-exporting countries see BITs as a way to protect their companies’ investment abroad, and to encourage the adoption in foreign countries of market-oriented domestic policies that treat private investment fairly. Capital importing countries expect that agreeing to offer BIT protections will reassure and encourage foreign investors.
The first BIT was signed in 1959 between Germany and Pakistan and its popularity quickly increased from the early 1960s on. In 1990 there were 470 treaties and in 2012 even 2.857. The reasoning and the background of the Multilateral Agreement on Investment (MAI) negotiations is partially to be found in these bilateral investment treaties. Other developments that have been provided as sources for MAI provisions include the North American Free Trade Agreement (NAFTA), which exemplifies the North-American model of investor promotion and protection with its distinctive feature of including pre-entry as well as post-entry protection for foreign investors; the 1994 Energy Charter Treaty (ECT), an experiment in multilateral standard-setting for trade and investment in a specific industrial sector; and the WTO Agreements in the mid-1990's dealing with investment-related issues, namely, the General Agreement on Trade in Services (GATS), the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), and the agreement on Trade-Related Investment Measures (TRIMS). In addition, there have been some notable institutional developments, adopted under the auspices of the World Bank, aimed at furthering the protection of investors.
II. Background / History
The year is 1995, the Annual Meeting of the OECD Council at Ministerial level is about to take place. This year the negotiations on the MAI were launched. The participants were the governments of all OECD countries at that time, the European Communities and early on countries were invited as observers e.g. Argentina, Brazil, Chile, Hong-Kong and China. Estonia, Latvia, Lithuania, and the Slovak Republic were later also invited as observers. The MAI was supposed to be a “Free standing international treaty, open to all OECD Members and the European Communities, and to accession by non-OECD Member Countries”. The objective was to “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”. In other words, it was an attempt of “multilateralization” of all the bilateral investment treaties, with some additional provisions.
The purpose of the MAI was to fix the present problems companies making cross-border investments are confronted with, including a vast array of different legal frameworks. Differences in laws, regulations and other international agreements would, of course, continue after agreement on the Multilateral Agreement on Investment, but investors would be assured non-discriminatory treatment and be provided with wider protection. The initiative aimed at providing a strong and comprehensive framework for foreign direct investment, widening the scope of existing liberalization and providing legal security for foreing investors. The proposed agreement seeks to “level the playing field” and ease market access, essentially by embodying the principle of national treatment (NT) in a multilateral and most-favored-nation (MF`N) context. In securing so, the MAI would be legally binding and contain effective dispute-settlement provisions.
In the proceedings there wasn't any major focus on the effects the MAI would have on e.g., the environment, human rights, and labor law in general. Was this the reason why after an intense three-year period until May 1998, negotiations ceased in December 1998?
III. The failure of the Multilateral Agreement on Investment
The fact that the negotiations failed was due to an interplay of various disagreements. On the one hand, some of the critical issues were treaty specific and on the other hand, the MAI was overambitious in finding a consent.
Firstly, one of the most problematic issues was the extent of the scope. The definitions of the terms “investor” and “investment” were formulated very broadly, almost over-ambitiously. Not only traditional foreign investments were covered, but also for instance real estate investments. The template in this regard was the draft text of NAFTA, which was also generally in favor of the introduction of a Multilateral Agreement on Investment, and other bilateral treaties. However, there was a lot of uncertainty as it was still doubtful whether the definition also covered portfolio investment. In this context, the wording of the provision of national treatment should also be criticized. The extent to which both pre-entry and post-entry phases were covered is not to the advantage of developing countries. They would lose the possibility of prior screening of an investment, as this would open the gates for uncontrolled access to foreign investment. A lot of treaties of SouthEast Asia pursue the contrary idea that only approved investments should be given protection.
The second concern was the ban on the performance requirements, which were intended to apply regardless of whether the host state had similar requirements for its domestic investors. This ban as an interest of industrialized countries, appeared not the first time, however, it would have been the most far-reaching. For example, export requirements, domestic content requirements, and national purchase requirements would have been included in the ban. The disadvantages here would be suffered by the developing countries because performance requirements give the ability to improve the sustainable development in a country. Especially developing countries should have and use this right. Furthermore, developing countries would have had to amend or abolish some of their investment laws to accommodate all the prohibitions.
Thirdly, another main reason for the failure of the negotiations was the provisions on expropriation and the following compensation. The MAI contained general safeguards and exceptions which should not be applicable to expropriation and compensation. Expropriations would therefore be protected from measures justified by customary international law. Not surprisingly, this was not in the interest of some states. The agreement also did not address the question of whether regulatory interference with foreign investment on environmental or human rights grounds should be considered as an exception. NGOs justifiably feared in this context that the property rights of the individual could be given priority before the rights of the international society regarding environmental issues for instance. These sensitive issues were clearly underestimated.
The fourth and most controversial factor was the investor-state dispute settlement procedure through third-party arbitration. This means of dispute resolution was not newly invented, but was already part of some international investment treaties, such as NAFTA. Nevertheless, some criticisms were raised in the course of the negotiations, most notably that foreign investors were granted special privileges in challenging host country decisions regarding compliance with the MAI outside the country’s jurisdiction. This regulation, therefore, seems to benefit only one party, the investors. Another argument was that this clause would give foreign investors and their legal representatives too much control over systemic policy issues and the law-making process. Both arguments were immediately a red flag for NGOs. An additional critical issue was the possible extension of the system to the pre-establishment phase. It was unclear how non-investors could file a claim against a host state. A permanent appeals body was presented as a solution to this problem. However, an examination of the technical details could not be achieved by the end of the negotiations.
Another relevant factor for the failure of the Multilateral Agreement on Investment was the missing political management and guidance through the process and all the negotiations. There was a lack of communication and transparency at all levels, from ministerial level to the population level. The negotiations were drafted in secret. From the moment when the provisions got widely known, NGOs became the biggest critics and organized a wide internet campaign against it. The MAI became the red flag for human rights and environmental groups. They criticized, with good reason, that the sole focus was on the protection of multinational cooperation. Many activists of the United States, influenced through different campaigns, argued that the agreement would be unfavorable for the rainforest. France and Canada were concerned that the broad-based agreement would allow industry from the U.S. to compromise their cultural identity. These examples show the influence that the NGOs had with their criticism on the individual governments.
An additional point of contention was the many exceptions for regional integration organizations. It was not surprising that each country represented and wanted to bring in its own interests in the negotiations. However, in any case it would have been problematic if there would have been more than a 1.000 country-specific exceptions. Unlike NAFTA, in which two developed countries were involved, the OECD MAI required all member countries to give their consent. The United States justified its objection by arguing that the many exceptions would be contrary to the aim of open market access.
IV. Outcome of the MAI Negotiations
After mentioning some of the main points of content, the question now arises as to what was the lesson from those three years of negotiating without any outcome. The MAI was the first experiment to codify international investment law. If the will is there again to resume the talks about a Multilateral Agreement on Investment, the same mistakes should be avoided. In the word of Confucius: Whoever has made a mistake and does not correct it, commits a second one.
The most important lesson from the MAI negotiations is that in new rounds of negotiations, the main focus should be on the political environment. Transparency plays a key role. Without the support of political forces on a national and international level, the support of NGOs, civil society, and the private sector in general, a new agreement will not find approval. It is of great relevance to include all stakeholders in the dialogue to build up confidence. NGOs in particular have shown the influence that Internet campaigns can have in overturning the negotiations on such an agreement. Social media platforms in particular have shown in recent years the influence they can have on the formation of opinion and the behavior of the civilian population. This should not be underestimated. It is therefore advantageous to give all the stakeholders, especially NGOs, the opportunity to express their views. In general, NGOs should join their forces to support the development of the investment scene.
Before future negotiations are launched, fundamental questions should be clarified in the context of a cost-benefit assessment and a feasibility study. Above all, questions of time, how and with whom one should form alliances to achieve one's goals should be brought into the room. The result should be a clear agenda agreed upon with all stakeholders, which efficiently brings a negotiation to a visible result.
Since the negotiations are very complex, the choice of who's sitting at the negotiating table must be made wisely. On the one hand, the more countries are involved, the more complex it becomes. On the other hand, another problem that led to the failure of the negotiations was the fact that the interests of the developing countries were not included. From the beginning, a representative body of states was missing. For the negotiations at that time, everything was centered on the OECD, in which developing countries are not represented. This is counterproductive, as the goal of the MAI was to improve investor protection and market access for these countries. However, at the time, OECD members had to convince developing countries to join the MAI and follow all the rules that came with it. The lesson from this would be to elect a different board that ensures a geographical balance and represents the interests of both sides. The developing countries have shown that their opinion on the conclusion of such an agreement is not irrelevant. More and more are raising their voices in support of the G-20 as the initiator of the negotiation process. The interests of developing countries would be represented here through the participation of regional organizations, such as the African Union. The involvement of international organizations, like for instance WTO and UNCTAD, must not be forgotten at this level either.
V. What's Next?
Reflecting on the failure of MAI negotiation, does the world still need the MAI? To begin,, with the development of FDI nowadays, we need a multilateral instrument to ensure the transparency of the host state as well as the legal security of the foreign investors, thus a comprehensive international regulation should come into place. Not only to ensure the legal protection, but Multilateral Agreement will also balance the power between the state parties, as tracing back to the root of the BITs in the post-colonialism era, there might be a disparity in the bargaining positions during the BITs negotiation. It is impossible to expect some of the developing countries to have state legal affairs that are knowledgeable enough to understand the complexities of the terminology afforded in the BITs. There's a high possibility that these BITs are signed with the expectation of attracting foreign investment. They contain no explicit commitment on the side of the capital-exporting state to ensure that such flows occur, while the developing countries give part of their sovereignty with the expectation that foreign investment will flow to their countries. Unlike the former regime, nowadays, FDI flows in both, developed and developing countries, thus we need to balance their interests. By having a Multilateral Agreement in the foreign investment regime, it would have balanced the interest between the developing and developed countries as negotiation rounds must be conducted, and the developing countries could represent their interest better compared to the ancient concluded BIT negotiation.
Secondly, we need Multilateral Agreement to uphold the MFN Principle as its application is frankly ambiguous nowadays. One of the cases where South Africa concluded a Double Tax Agreement (DTA) with the Netherlands for a minimum tax of 5%. However, the Dutch taxpayer argued that because of the dividend tax provided in the South Africa-Sweden DTA and it is concluded after the South Africa-Netherlands DTA, an exemption or lower rate in South Africa-Sweden DTA shall automatically apply to the South Africa-Sweden DTA according to the MFN principle. The South African Tax Court ruled in favor of the taxpayer, ordering the South African Revenue Service (SARS) to refund all tax withheld on dividend income received by Dutch shareholders during the relevant period. MFN clauses appear to have had relevance as negotiating tools in the past, but in the present, such future commitments under MFN clauses are proving to be powerful forces pushing the other countries to their edge. FDI flows in developed cities for "reduced taxation" and exposes lower-income countries to the risk of tax deduction.
Reflecting on the South Africa case, does the MFN principle balance between the developing and developed countries? This leads to the argument that a Multilateral Agreement is urgently needed to balance the interest between countries, however, it seems unrealistic to apply the top-bottom approach which was promoted by the MAI. Why? On one hand, it would promote the liberalization of FDI but at the same time, it would not protect the interest of developing countries. I personally do not against the principle of MFN nor suggest that MFN should not be applicable to developing countries. Rather, applying the same strategy as the General Agreement on Tariffs and Trade (GATT) in promoting special and differential treatment provisions, might promote the adoption of a Multilateral Agreement. Moreover, as could be seen under Article 8 (3) Netherlands Model BIT which limits the scope of the MFN, I do believe this practice might corrupt the MFN principle itself. Imagine if each BIT has this provision that limits the MFN principle, then, the MFN principle will be rendered inapplicable and irrelevant as each country can simply use this clause as the MFN defense. It is reasonable to believe that the Multilateral Agreement will play a major role to decide whether MFN remains relevant in the current FDI regime, thus the state parties should either uphold it faithfully or it might be a “downfall” of MFN. The MAI will also prevent such exceptions as provided under Article 8(3) Netherlands Model BIT as the agreement will be binding for every state party.
Thirdly, Sovereign Wealth Fund (SWF) is becoming a major trend in the FDI sphere. Numerous recipient countries have questioned and raised their concerns about the funds' transparency and their objective with their national security as their primary concern. This is the reason why an MAI is needed to bridge the interests between the giving and receiving countries in relation to the latter's national security. This also will provide a uniform definition of whether SWF could be treated as Investment. Last but not least, the main problem of ISDSis the inexistence of an appeal court, therefore, it does not have quality control, unlike the national court. The “missing puzzle” often leads to the various treaty and legal interpretations as the result of arbitration; no wonder, the ISDS regime does not acknowledge the binding nature of the arbitration case-law system, therefore, it leads to legal uncertainty. In order to tackle this issue and promote more advanced dispute resolution, the EU has brought multilateral court proposals to the table.
VI. Is there a need for a Multilateral Investment Court?
Since the early 2000s, ISDS claims have targeted industrialized countries, the EU Member States not excluded. The figure below reports the total number of ISDS cases initiated against EU Member States (orange line; EU membership at case initiation). The number of ISDS cases initiated by non-EU investors against EU Member States (light blue line) has boomed from nearly no cases in the early 2000s to an average of four cases per year since 2010, with a peak of nine cases initiated in 2015. In the UNCTAD ISDS case database (July 2019), there are 332 pending cases against the EU Member States, of which 47 were initiated by non-EU investors. Finally, out of the 421 ISDS cases for which an arbitration decision has been delivered, 230 decisions (54 %) are in favor of the Member States. This figure shows that there is an overall growth in the number of initiated ISDS cases, that has either EU respondents and/or EU claimants. Further, it illustrates that the ISDS cases are not a new thing, but together with the problems concerning the present ISDS, the EU proposes a new Multilateral Investment Court as the solution.
EU´s proposal to cure the shortcomings of the dispute resolution mechanisms with a Multilateral Investment Court is heavily inspired by the dispute settlement system which exists in the World Trade Organization (WTO). The new system has been introduced to replace the ISDS mechanism existing in most international investment treaties.
In theory, the new dispute settlement mechanism would constitute a step towards a coherent international investment body of jurisprudence. The court would be composed of independent and impartial judges. The introduction of an institutionalized judicial system aims at achieving predictability of judgments -mostly due to establishing an appellate tribunal - and more control over the costs of the proceedings and their length. However, given the criticism surrounding the WTO Appellate Body in recent years and the crisis of the WTO dispute settlement system, we are yet to see whether the proposal to transplant a similar structure to the investment field will prove to be successful. The question is whether the transplanting of the mechanisms of the WTO dispute settlement system into the Multilateral Investment Court renders the initiative doomed to fail.
VII. Criticism of the WTO Dispute Settlement System
The WTO dispute settlement system has faced criticism on multiple counts. The main reasons are being inconsistent and unpredictable, impartial and independent, regulatory chill, and lack of transparency.
The ISDS crisis in the EU has two dimensions – the concerns relate to the intra-EU investment arbitration as well as the extra-EU investment arbitration. The legitimacy of BITs containing ISDS provisions within the EU has been challenged since the Lisbon Treaty entered into force in 2009. Under the Treaty, the power to conclude BITs was transferred to the EU itself. During the travaux préparatoires, the European Commission proposed that it should have the authority to force termination or renegotiation of existing BITs concluded between the EU Member States in cases it found that BITs were incompatible with EU law. The proposal did not receive much support and ultimately it did not prevail. Most of the Member States shared the view that intra-EU BITs are necessary and despite certain shortcomings, they decided to keep them in their current shape. However, given the ruling of the Court of Justice of the European Union (CJEU) in Achmea B.V. v. The Slovak Republic in which the Court found that arbitration clauses in the intra-EU BITs violate the principles of EU law, the EU Member States agreed on a plurilateral treaty to terminate the intra-EU bilateral investment treaties.
The increased criticism towards ISDS made the EU seek alternatives. Its reform is based on two pillars: first, inclusion of the Investment Court System (“ICS”) provisions into the newly negotiated treaties, and second, establishing a Multilateral Investment Court in lieu of ISDS. The proposal to include ICS mechanism into the treaties was introduced whilst Trans-Atlantic Trade and Investment Partnership (“TTIP”) was negotiated. Further, the proposal made its way into the treaties with Canada (the Comprehensive and Economic Trade Agreement (“CETA”)) and Vietnam (the EU Vietnam Free Trade Agreement). On the 5th of May 2015, the EU issued a concept paper “Investment in TTIP and beyond – the path for reform” in which it included an outline of an alternative to the ISDS mechanism. The EU took a step further beyond the bilateral ICS included in CETA and proposed a creation of a permanent Multilateral Investment Court “which functions more like traditional court systems, by making their appointment to serve as arbitrators permanent, to move towards assimilating their qualifications to those of national judges, and to introduce an appeal system”.
The main reasons for seeking a change and introducing an institutionalized judicial system are the predictability of judgments, independence, and impartiality of judges, appellate stage, and more control over the costs of the proceedings and their length. Additionally, since 2017, the UNCITRAL Working Group III has been discussing potential options for amending ISDS. Issues arising out of the creation of a Multilateral Investment Court have been discussed, especially concerning its jurisdiction, relations to other legal norms and institutions, the appellate mechanism, and the appointment of adjudicators. There are still numerous questions left for consideration, pertaining mostly to the structural and enforcement issues. The current negotiations on establishing an investment court, and in a further stage a Multilateral Investment Court, however, does not address the substantive investment standards, such as Most-Favored Nation Treatment, Fair and Equitable Treatment, Full Protection and Security, and National Treatment. Therefore, currently, the discussion is mainly focused on addressing the change of structural aspects of the ISDS as we know it, however, the treaty imbalance creating a symmetrical protection regime (such as the possibility of counterclaims) has been neglected so far. The ISDS reform is difficult given the number of IIAs already in place. The initial proposal of a bilateral system in CETA seems to be insufficient on a bigger scale. Therefore, establishing a truly multilateral investment court could aid in achieving a long-term goal.
Another problem is that the proposal does not include substantive protection of investment agreements such as imposing obligations to protect human rights and the environment. Public Service International (“PSI”; a global trade union federation advocating for human rights and social justice) accused the proposal of being “the EU’s latest corporate privilege rebrand”. They have earlier expressed their concerns about the Investment Court System (ICS) as being the wolf in sheep´s clothing and now with the MIC, the “PSI” is calling it the wolf´s newest outfit. This clearly shows that there are opposite opinions on the proposal for a new multilateral investment court that should solve the problems surrounding the ISDS.
VIII. Conclusion
To begin, The MAI's goal was to eliminate the current issues that cross-border investments face, such as a plethora of different legal frameworks. It is undeniable that MAI is going through a bumpy road, the failure of the negotiations at the time was due to the interaction of various disagreements. Some of the critical issues were treaty-specific and overly ambitious in terms of reaching an agreement. One of the most problematic issues was the MAI's sheer scope. The second concern was the prohibition on performance requirements, which was expected to apply regardless of whether the host country had similar requirements for domestic investors. Third, the provisions on expropriation and subsequent compensation contributed to the failure of the negotiations, while the investor-state dispute settlement procedure was the most contentious issue. Another important factor in this Agreement's failure was the absence of political management and guidance throughout the process and all negotiations.
The most important lesson from the MAI negotiations is that the main focus of future rounds of negotiations should be on the political economy. Transparency is essential. A new agreement will not be approved without the support of national and international political forces, NGOs, civil society, and the private sector in general. It is essentially critical to include all stakeholders in the dialogue in order to build trust. Overcoming the various hurdles in the negotiation, the EU brings the Multilateral Investment Court proposal to the table.
The EU's proposal aims to correct the current system's flaws. Previously, there was no coherent protection regime in international investment law, only a patchwork of bilateral and regional treaties. As a result, the EU intends to establish such a multilateral system. However, given the past reluctance of states, it may necessitate complex political negotiations on a global scale. Nonetheless, as observed by Pauwelyn, “today’s benefits of a multilateral treaty must outweigh today’s cost of negotiating a multilateral treaty and replacing thousands of BITs and a variety of arbitral institutions with a world investment court”.
The United Nations Commission on International Trade Law (UNCITRAL) Working Group III is currently debating the establishment of such a Multilateral Investment Court. The fact that the CJEU confirmed the validity of the Investment Court System in CETA under EU law in its Opinion 1/17 of 30 April 2019 encourages the European Union to pursue its agenda of reforming traditional ISDS by establishing such a Multilateral Investment Court.
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