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CHAPTER 13:
INVESTMENT
[A] mechanism that has caused fiscal stress is the intensification of
bidding wars among governments - national and subnational - to offer subsidies
and tax and regulatory incentives to transnational investors. This has
also increased the pressure to crowd out social spending. [Bruce Campbell,
27:1555]
Foreign Direct Investment Developments
International investment, particularly direct investment, has increased
dramatically over the past decade and, as a result, the global stock of
foreign direct investment (FDI) has risen from US$1 trillion in 1987 to
US$3.5 trillion in 1997. This investment activity primarily involves about
53,000 multinational enterprises with almost 450,000 affiliates. Since
this growth has substantially outperformed that of both the world's gross
domestic product (GDP) and world trade, the ratio of inward plus outward
FDI stocks to global GDP is now 21% and foreign affiliate exports make
up one-third of world exports.
These statistics make for a very telling story: the businesses of developed
countries have, in general, internationalized their activities, weaving
an intricate web of linked corporate activities around the globe in pursuit
of being a more competitive player. The source of increased competitiveness
would be the unique location and production advantages offered by the host
country, but both the host and home country also gain from this cross-border
investment:
[B]oth inward and outward foreign direct investment is conveying substantial
economic benefits on both the host and home country. These benefits stem
from increased specialization with resulting productivity gains, the faster
spread of new technology to host countries, the salutory effects of increased
competition on domestic companies and the ability to realize scale and
scope economies for smaller companies. [Steven Globerman, Submission, p.
2]
The economic effects of these new global strategies extend beyond corporate
competitiveness. They have significantly transformed the international
trading scene in two major ways. First, the international economy of the
postwar years, which largely featured cross-border transactions of goods
and services between unrelated firms or individual residents of different
countries, has given way to a much more integrated trading environment.
Parts or components of the more complex manufactured products are increasingly
being traded across political borders between non-arm's length corporate
entities for assembly nearer to their points of consumption. Second, trade
and investment, which at one time were thought to be strictly alternative
means of accessing foreign markets - the latter to get around trade barriers
- have proven to be complements now that these barriers have come down.
Together, these two facts mean that a country's trade performance is increasingly
dependent on its FDI activity.
Canada has been no stranger to these developments. Indeed, FDI is of
increasing importance to Canada both as a host country and especially as
an outward investor. The outward stock of FDI originating from Canada has
risen fivefold from US$22.6 billion in 1980 to US$137.7 billion in 1997,
while its inward stock has risen more than two and a half times from US$54.2
billion to US$137.1 billion over the same period. Most of this investment,
highlighted in Table 2.1, takes place within the Americas, with the United
States partaking in the lion's share. The result has been a hemispheric
hub-and-spoke investment network, whereby the United States is the primary
hub and Canada is a secondary hub in exporting capital to Latin America
and the Caribbean.
An FTAA Investment Agreement
The investors of developed countries are, as was demonstrated by the
Organization for Economic Co-operation and Development's Multilateral Agreement
on Investment (MAI) initiative, looking for greater institutional protection
of their foreign-based assets - protection beyond that afforded them by
the Agreement on Trade-Related Investment Measures (TRIMs) and the General
Agreement on Trade in Services (GATS) which are administered by the World
Trade Organization (WTO). Canada, as a net FDI exporter, is also seeking
additional investment rules - fair and equitable rules, given that they
are reciprocally conferred - to complement existing trade rules.
In the context of the Americas, Canada would logically seek to rationalize
its foreign investment protection agreements (FIPAs) with countries in
the region, as well as expand coverage of their provisions to countries
with which it does not have an investment treaty. Box 13.1 provides the
general sorts of protection measures that Canada would be seeking.
To assess the incremental protection that these provisions would provide
Canada's foreign investors, the Committee made use of the Inter-American
Development Bank's study on foreign investment laws and policies of the
region. By way of summary, almost all countries have constitutions that
guarantee private property, free enterprise and equal treatment of nationals
and foreigners. Although all countries place limits on these property rights,
most importantly they provide grounds for expropriation in cases where
there is a public necessity, public utility, social purpose for property,
promotion of agrarian reform, national security, etc. The regulations on
compensation for expropriation differ substantially, but as a general rule
it is set at market value or loss incurred either by legal proceedings
in the absence of an agreement or by administrative mechanisms; though
the definitions of "market value" and "loss incurred"
themselves are a source of uncertainty. In some cases, for reason of equity,
no compensation may be offered. Compensation is usually paid in advance
of taking possession.
Almost all countries have a statute on foreign investment that has been
modified since 1990, with a government agency responsible for administering
its provisions. Most countries do not place restrictions on remittances,
though in exceptional cases they are imposed on capital repatriation. Transfers
of foreign investment capital could take several forms. In general, the
modalities are: freely convertible foreign currency, tangible property,
technology, loans associated with foreign investment, intangible goods,
and capitalization of credits or profits. Every country has some sectors
of the economy reserved exclusively for the state and are, therefore, not
subject to foreign participation; on a hemispheric basis, the list is long.
Generally, there are no performance requirements for foreign investors
except in specific circumstances; these circumstances vary significantly
throughout the region. Foreign and domestic firms are taxed at the same
rate, the lowest applied to profits in the region being 25%. Special taxes
on foreign investment occur only in special cases: free trade zones, external
debt conversion programs, etc. Canada has double taxation treaties with:
Argentina, Barbados, Brazil, Dominican Republic, Guyana, Jamaica, Mexico,
Trinidad and Tobago and the United States. In terms of dispute settlement,
foreign investors are, in most cases, not afforded any additional recourse
beyond that which is assured to nationals, except as provided in the North
American Free Trade Agreement (NAFTA).
It is not news to claim that the lowering of political risks to foreign
investors would lead them to be less demanding in the returns on investment
they seek and thereby stimulate greater cross-border capital flows. What
is news is that, since discarding their import-substitution strategies,
Latin American countries have through free trade and customs union agreements
realized greater flows of FDI. Some countries have adopted special investment
incentives to attract even more foreign capital.
Latin American officials repeatedly link the existence of trade agreements
of different kinds - such as free trade areas, customs unions, and common
markets - ... and the inflow of foreign direct investments to a particular
region. For instance, ... the Communidade Andina ... have a list of results
... and I quote, "The considerable increase in FDIs, more than 8 times
going from U.S.$1.14 billion in 1990 to U.S.$9.792 billion in 1997..."
Another example is found in a paper written to ALADI by the Brazilian ambassador,
José Artur Denot Medeiros. ... [H]e states that "the increase
in the capacity to attract FDIs" - foreign direct investments - "and
the growing importance of inter Latin American countries' investment flows"
are acting, in conjunction with trade agreements, as "integrating
factors." Clearly, the predominant view is that these agreements are
generating both trade and investments. [Annette Hester, 31:1610]
The danger here is in going too far in terms of providing incentives
to attract foreign investment, most often it takes the form of subsidies
and special tax breaks. Should things get out of hand and bidding wars
take place, a "race to the bottom" scenario in social program
spending could indeed come to fruition.
Since an FTAA agreement would mean extending protection rights to investors
of other signatory members and that these rights to some extent involve
a loss in national sovereignty, the Committee is well aware that their
conveyance is not simply to be maximized. A careful balance must be struck
between what is fair to multinationals and what is fair to the state. Indeed,
the Committee was advised many times by the public, as was the case in
its deliberations on the MAI and the WTO Millennium Round, to make sure
we do not turn an investment agreement into a "charter of corporate
rights."
In many ways they strengthen the power of corporations. In fact, in
many ways the rules are designed by international corporations. They strengthen
the power of investments. They give them the tools to challenge democratic
governments, undermining governments that are acting in the public interest.
[Bob White, 122:1025]
There are at least two issues here. First, it has been argued that the
inclusion of an investor-state dispute settlement mechanism, such as is
provided in Chapter 11 of the NAFTA, arms foreign investors with an additional
legal vehicle not available to domestic investors. Second, some suggest
that such an investor-state mechanism undermines the ability of governments
to maintain public services, such as health care on a non-commercial basis,
the environment, and health and safety.
In terms of foreign direct investment, this has been mentioned before,
but the NAFTA dispute-settlement mechanism, chapter 11, has raised a number
of problems. I think those stem from the application of commercial arbitration
rules on issues of public policy, which is probably not the best way to
arbitrate issues of public policy. This isn't necessarily an indictment
of direct access on the part of non-state actors to dispute settlement,
but rather the suggestion that a closer look be taken at process issues
such as transparency. [Julie Soloway, 122:950]
Yet others insist that these assertions of a "race to the bottom"
scenario in social program spending by way of an investor-state dispute
settlement clause are unfounded. While Chapter 11 of the NAFTA is currently
undergoing several challenges, not one case has yet been decided one way
or the other. The Committee reminds those who cited the Ethyl Corporation's
case against the Government of Canada that the MMT legislative ban violated
Canada's interprovincial agreements and, therefore, the proverbial NAFTA
jury is still out. Moreover, the representatives of corporate interests
are not totally in disagreement with these opponents on the intended purpose
of an investor-state dispute settlement clause. They have consistently
argued the position that any investor-state dispute settlement process
should not be a source of government paralysis on important matters of
public interest.
[T]he critical concept of `expropriation' of foreign investment which
triggers the binding dispute settlement mechanism needs to be better defined.
Bona fide and legitimate areas of regulation and law-making by governments,
where there is no real taking away of an asset involved, should be carved
out from the agreement. Other aspects of the investor-state provisions,
including issues of secrecy and lack of openness in the process, as under
the current rules in the NAFTA, must also be addressed. [Jayson Myers,
Submission]
The Committee agrees and recommends:
25. In view of the concerns arising from the interpretation of `expropriation'
in the investor-state provisions of the North American Free Trade Agreement
(Chapter 11), the Government of Canada should ensure the incorporation
of a narrowly-defined concept of expropriation in any negotiations on investment
in the Free Trade Area of the Americas agreement.
Given the tremendous growth in FDI over the past two decades, it is
worth questioning the need to seek greater protection beyond that extended
in Canada's FIPAs. Some net benefit analysis is required before such steps
are taken. At the same time, since most of this growth has occurred between
developed countries and an FTAA would primarily be made up developing countries,
the Committee sees the FTAA as an opportunity to extend the coverage of
existing investment protections, as contained in Canada's current FIPAs,
in the Americas beyond the seven countries where they are in force today.
The Committee recommends:
26. That the Government of Canada seek a Free Trade Area of the Americas
agreement that includes investment provisions modelled on Canada's current
Foreign Investment Protection Agreements with Latin American and Caribbean
countries.