There are differences of both a substantive and stylistic nature in the January and May 1997 drafts of the Multilateral Agreement on Investment (MAI). In some cases the MAI's scope has been widened or narrowed, in others draft language has been finalized by consensus of the delegates, and in still others the meanings of the provisions have remained the same while their wording has changed. The following highlights significant changes made to the January 1997 draft.

The most significant substantive changes have been made to the controversial tax and financial services provisions. Both have been narrowed significantly, reflecting a general consensus that existing international instruments covering both of these areas not be superseded. Almost of critical importance, consensus has solidified concerning the inclusion in the MAI of the so-called investor-to-state dispute resolution process, which allows individual corporations in one member country to sue a government in another member country for damages when they believe that governments has enacted a law or policy that is in violation of the agreement. Proposed preambular language concerning labor and environmental standards has been added to the May text and has received significant political attention, but because of its non-binding nature is unlikely to have any substantive implications.

The draft language of many MAI provisions has been removed from brackets. This indicates that a consensus has been reached among negotiators to include such provisions. However, as USTR officials have noted, this does not mean that the unbracketed language is not subject to possible revision during the remaining "give and take" of the negotiations process. Similarly, some language appears in brackets in the new draft that has little, and in some cases no support, outside of the single delegation proposing it.

Overall, the May draft reflects the solidification of consensus on the fundamental MAI provisions outlined in the January draft, some scaling back of the negotiators ambitions in a few key areas (for example, taxation, financial services and limitations on certain "performance requirements"), and emergence of a few new wrinkles that merit the attention of observers of the negotiations.

The most relevant changes are outlined below.

The Inclusion of Preambular Language: The MAI now contains draft preambular language communicating the important role that the signatories ascribe to foreign investment in the world economy, and affirming the role the agreement will purportedly play in improving living standards and creating jobs. The May draft also contains preambular language on the environment, labor and on the intent to use the MAI to influence WTO negotiations on investment. The latter three provisions are under dispute, however. The environmental provisions, which would not be binding, affirm that the MAI should be implemented in a manner consistent with environmental protection and conservation; and restate the signatories' commitment to the Rio Declaration, Agenda 21 and to sustainable development. The labor language stresses a non-binding commitment to honor internationally recognized core labor standards (freedom of association, the right to organize and bargain collectively, the prohibition of forced labor, elimination of child labor, and non-discrimination in employment.) There is disagreement among negotiators as to whether the non-binding OECD guidelines on corporate responsibility should be appended to the agreement.

While some observers consider the addition of draft preambular language significant, USTR officials have made it clear that no binding, enforceable provisions on these issues will, in all likelihood, appear in the final text. Thus, in our view, while the broader debate over preambular language reflects some political shifting taking place within the negotiations, the limited purpose and function preambular language in general makes it unlikely that this language will have any substantive implications in terms of the MAI's impact.

Definition of Investment: The January 1997 draft contained a negative list of transactions or assets that do not constitute investments. These included public debt, financial assets, real estate not acquired in the expectation or used for the purpose of economic benefit or other business purposes, or personal property. The negative list has been removed in the May 1997 draft, potentially expanding the definition of investment. However, the May draft indicates that an interpretive note will eventually be added to state that an asset "must have the characteristics of an investment, such as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk" to qualify as an investment under the MAI. This vaguer language means that MAI dispute resolution panels would have to determine, in ambiguous circumstances, whether a particular asset constitutes an investment (e.g. land acquired for conservation rather than for commercial exploitation).

"In Like Circumstances Clause" of the National Treatment Provision: The U.S. negotiating team has been pushing for inclusion of language that they claim will clarify the meaning and narrow the scope of National Treatment. This narrowing of scope would be achieved, they claim, by placing the words "in like circumstances" after "Each party shall accord to investors of another Contracting Party and to their investments, treatment no less favorable than the treatment it accords [in like circumstances] to its own investors. . .". While this bracketed clause, which is taken from NAFTA's national treatment provision, appeared in the January text as well as the May text, it is worth mentioning as USTR is intensifying efforts to include it in the MAI. U.S. negotiators argue that this clause will resolve the tension between treatment towards foreign investors that is different versus that which is less favorable or discriminatory. It will allow, for example, regulators to obtain information from foreign-owned firms who must furnish it from overseas. While compliance may be more onerous in the case of the foreign based investor, under the "in like circumstances clause" regulators would merely being establishing equal requirements for foreign and domestic firms. Negotiators also argue that this clause would ensure that foreign investors would receive treatment as favorable as domestic companies only in the relevant areas of application. This means that if certain reporting requirements are more onerous for banks, for instance, than for manufacturers, foreign banks couldn't demand that host governments treat them as well as domestic manufacturing firms.

Despite the claims by USTR, our view is that this provision, which lacks clarity, would have limited success in significantly narrowing the national treatment clause. For example, MAI drafters have distinguished between de facto and de jure discrimination in the commentary section of the agreement and in various OECD working group papers. The principle of de facto discrimination or discrimination occurring "in fact" if not in law will be applied in cases where a law or policy has a discriminatory impact. Thus, even if a government doesn't explicitly discriminate against foreign investors, any impact that may be experienced as less favorable could be in violation of the MAI under the de facto discrimination standard regardless of whether the proposed "in like circumstances" language is included in the agreement.

Performance Requirements:

The performance requirements section, which limits the conditions that governments may impose on investors in exchange for market access, includes a prohibition on the mandatory hire of a certain number of local personnel. In the May draft this clause is amended to reflect recent disagreements as to whether the ban should be aimed at national instead of local residency quotas for hiring. However, a ban on national residency quotas could cover a wider array of employees, effectively prohibiting hiring practices based on national as well as local residency.

A draft provision on a government procurement carve-out for certain performance requirements has been included in the May draft, but is still under negotiation. Governments often leverage their market power to fulfill certain public policy objectives like economic development or environmental protection by imposing performance requirements to compel contractors or subsidy recipients to advance such policy objectives. A bracketed provision in the MAI would allow governments to impose the following performance requirements on contractors and subsidy recipients: 1) achieving a certain level or percentage of domestic content (domestically produced materials or inputs); 2) to purchase, use or accord a preference to goods produced or services provided in its territory, or to purchase goods or services from persons in its territory; 3) to transfer technology to a person in its territory; and 4) to supply one or more of the goods that it produces or the services that it provides to a specific region or the world market exclusively from the territory of that contracting party. However, employment requirements, like hiring locally, investment requirements, or research and development requirements are not included in the carve-out for government procurement. These mechanisms play an import role in economic development strategies that tie performance requirements to government procurement.

Investor-State Dispute Resolution Mechanism: It appears that MAI negotiators have agreed to include an investor-to-state dispute resolution in the MAI, and have agreed on the basic language of the provisions.

Negotiators reached a consensus that each contracting party compel its domestic courts to enforce MAI judgements, as reflected in the removal of brackets from this provision in the May draft. This provision could require implementing legislation compelling courts to recognize the binding legal nature of the rulings of MAI dispute resolution panels.

The May agreement allows the investor-state dispute mechanism established under the MAI to be used by investors to enforce contracting parties' obligations toward specific investments incurred under other agreements or under investment-specific authorizations granted by a signatory government. This provision would allow foreign investors to enforce any private contract or other agreement giving them rights vis-‡-vis MAI signatory countries under its dispute resolution mechanism.

In the May draft the brackets have been removed from the "standing of the investment" section, enabling a subsidiary of a parent company to sue on its own behalf. That a subsidiary could be constituted under the laws of the host state and be considered foreign for dispute resolution purposes further blurs the distinction between foreign and domestic companies under the MAI.

The May 1997 draft enables contracting parties to lodge preliminary objections as to the jurisdiction of the tribunal over the matter in question. The tribunal will have 60 days to either admit or dismiss the case.

A provision concerning third party rights appears in the May draft. This clause gives contracting governments not party to the dispute the right to submit oral or written comment on the case. An example of where this might be relevant is the Ethyl case now under arbitration under NAFTA's dispute resolution provision. Under this same third party provision in NAFTA the U.S. government would be able to comment on the suit. Despite this right, the U.S. has decided not to exercise the option, however. Yet MAI framers do acknowledge that contracting parties should have a say in the interpretation of the agreement.

As in the state-to-state section, disputing parties or the arbitration panel may request scientific assessments of any environmental or public health and safety impacts under dispute.

Senior Management and Membership of Board of Directors: The May 1997 draft stipulates that a country not prohibit foreigners from serving in senior management positions and on corporate boards of directors.

Employment Requirements Provision: The May draft contains a provision stipulating that MAI employment requirements will not interfere with anti-discrimination or labor laws. Thus, while a nation may not deny employment on the basis of nationality, it may impose positive obligations not to discriminate (or to hire a certain number of people of a certain race).

Corporate Practices: The January draft indicated that corporate, as well as governmental practices would be covered by MAI non-discrimination provisions. This meant that corporations could not discriminate against foreign investors by limiting their acquisition of shares, imposing residency requirements on a company's board of directors or issuing different classes of shares with different voting rights. Under the May draft, however, corporate practices have been carved out of the MAI.

Not Lowering Standards: In the May draft the U.S. proposed language similar to NAFTA's article 1114.1 on not lowering health, safety, environmental or labor standards to attract investment. Under this clause, which states that nations "should" not relax standards to attract investment, a contracting party can request consultations with another whom it suspected was doing so. A second provision, similar to NAFTA article 1114.2 would, by substituting the word "shall" for "should", enjoin contracting parties not to lower standards to attract investment. If included in the agreement the binding nature of the word "shall" could subject contracting parties to dispute resolution procedures. These provisions, which have been placed in brackets, do not appear to have much support, however.

State to State Dispute Resolution Provision:

In a major departure from previous state-to-state dispute resolution rules, MAI negotiators have agreed to enable states to seek monetary compensation against other states under the dispute resolution process as opposed to the traditional practice of imposing sanctions. At this time it is unclear whether the government will be awarded the compensation on behalf of a bereft investor.

The May draft establishes an secondary roster of experts to assess health and safety and environmental impacts of investment at the request of parties of a dispute or the arbitration panel itself.

Exceptions Provisions:

The May draft allows contracting to take a temporary exception or "derogation" from MAI provisions on national treatment and right of financial transfer in the event they suffer a balance of payments crisis or currency crisis. The May draft stipulates the any temporary safeguards be reviewed and approved by the International Monetary Fund (IMF). These reviews will take place every six months until the measures are eliminated. If the IMF rejects the safeguards, the dispute resolution mechanism is activated, enabling investors to sue.

A new section provides that the MAI's national treatment, most favored nation treatment (MFN) and transparency provisions do not apply to transactions carried out in pursuit of monetary and exchange rate policies by a central bank or monetary authority. Yet such measures can be scrutinized in the event that an investor argues that they are being used to avoid the commitments or obligations under the MAI.

As of the May draft, MAI negotiators had not reached a consensus on whether expropriations transfers could be suspended under balance of payments derogations. If a nation in a balance of payments crisis still had to satisfy compensation requirements incurred under the MAI's expropriation provision, the crisis could become exacerbated, especially in the event that claims on behalf of multiple investors are consolidated.

Financial Services Section:

The section on New Financial Services has been removed from the MAI. This controversial provision may have enabled foreign-owned banks to provide financial services that are either not provided in a host country or those that banks are not allowed to provide under the host country's regulations. This provision would have gone further than the market access provisions of the GATS agreement on financial services. Indeed such a provision may have had implications for regulatory regimes that restrict investment in the banking industry to other financial services providers or banking industry regulations that maintain a distinction between commerce and banking.

A new section on "determination of certain financial services issues in investor-state proceedings" has been added to the May draft. This provision sets up a special process for resolving investor-to-state disputes in the financial services industry, specifically those arising from policies under the exceptions section: balance of payments derogations, safeguards for monetary policy and prudential measures (i.e. laws or policies a government uses to ensure the solvency of financial institutions). In a dispute, the contracting parties or the authority responsible for its financial services will be asked to determine whether the reason invoked is a legitimate reason for discriminatory treatment or treatment otherwise violative of the MAI. The tribunal will defer to the judgment of the contracting parties if they agree. If not, the home government of the investor may initiate a state to state proceeding. If this does not occur, the investor may exercise its legal standing to sue the government. The arbitral panel in financial services disputes will be composed of financial services experts.

Taxation:

It has been a matter of some controversy as to whether taxation measures would be subject to national treatment obligations. The May draft reflects wide agreement -- though not consensus -- that taxation be carved out of national treatment requirements. However, a national treatment text with respect to taxation proposed by one delegate has been preserved in a footnote in the May draft.

Tax measures will be scrutinized insofar as an investor argues that these constitute expropriation. However, the taxation as expropriation clause has been narrowed in the May 1997 draft. Any tax measure in force and transparent at the time an investment is undertaken can not be considered expropriatory nor can a tax measure that is considered "within the bounds of internationally recognized tax policies and practices".

Non-Applicability: The MAI makes a distinction between contracting and acceding parties to the agreement. Contracting parties are OECD countries who initially adopt the agreement. Acceding parties are those outside of the OECD -- most likely third world countries -- who wish to take on the MAI's obligations. In an interesting development in the May draft negotiators finalized language stating that the agreement will not apply between a contracting party and an acceding party without the consent of the contracting party. Thus, any obligations incurred to acceding nations would have to be generated through bilateral negotiations, and would not be automatically assumed.

Withdrawal: MAI Negotiators finalized language appearing in the January draft that effectively would bind contracting parties to the agreement for 20 years. This provision marks a striking and controversial departure from previous agreements like NAFTA, for instance, which impose much less onerous time commitments on signatories. If a MAI signatory wishes to withdraw from the agreement, it must wait five years, and then continue to honor its obligations to existing foreign investors/investments for another 15 years.

Annexes: A number of annexes have been appended to the May 1997 MAI draft that contain controversial proposals to exempt certain sectors from the MAI as well as country-specific proposals for additional language in the MAI. Particularly noteworthy are the European Community's annexation of a "clause for regional economic integration organizations" that effectively exempts EC members from treating investors from other countries as well as those from the community, and France's clause protecting the cultural industries from foreign competition. The EC also stipulates in an annex on subnational measures that contracting parties receive in-state treatment when in-state treatment is more favorable than treatment offered to investors from other states. For example, if the state of Georgia treats investors from Georgia better than investor from Florida, investors of MAI signatories would receive treatment as favorable as the Georgia investor, and more favorable than the Florida investor. Finally, the EC has drafted a clause on public order, stipulating that nothing in the MAI shall be construed to prevent a contracting party from taking actions strictly necessary for the maintenance of public order.

*