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LGD 2000 (1) - Sol Picciotto


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Lessons of the MAI:
Towards a New Regulatory Framework
for International Investment

Professor Sol Picciotto
Lancaster University


This Commentary was first published on 26 July 1999 and again as part of the first full edition of LGD on 20 December 2000.

Citation:Picciotto S , 'Lessons of the MAI: Towards a New Regulatory Framework for Interntational Investment',2000 (1)Law, Social Justice and Global Development (LGD). <>. New citation as at 1/1/04: <>

1. Introduction

On 3rd December 1998 it was officially announced that negotiations for a multilateral agreement on investment (MAI) at the OECD were ended. It seems appropriate to reflect on and learn from this failure, especially since it followed four years of preparatory work, and three years of negotiations intensively conducted through a high-level group and numerous working parties. The view of some of those most directly involved with the MAI appears to be that the proposed treaty should now be taken up, with a few modifications, in the wider forum of the WTO. This was the advice given in the Lalumière Report (French Government, 1998), which had prompted the French government to withdraw from the OECD negotiations in October 1998, thus precipitating their collapse. It was apparently also the view of the European Commission's DG1, expressed in a Note to the 'Article 113 Committee' widely but unofficially circulated on the Internet in late January 1999 (European Commission, 1998).

This Note put forward the 'elements of an ideal result' which should be aimed at from a WTO negotiation, for which it argued that a mandate should be sought from the WTO Ministerial Meeting, to be held in Washington DC in November 1999. DG1's suggested 'ideal' is an agreement very like the MAI. The only significant modifications envisaged are, firstly, that instead of a 'top-down' liberalization commitment (i.e. subject to each country's itemised exceptions), it might follow the GATS model and be 'bottom-up' (i.e. liberalization of admission based on national schedules, but with significant opening commitments). Secondly, it suggested that an attempt might be made to negotiate some 'disciplines' on investment incentives offered by states, which was a notable omission in the OECD draft MAI. Additionally, it indicated possible concessions, for example a narrowing of the scope of investments covered, although perhaps only in relation to admission obligations.

The suggestion that a MAI-style agreement should be envisaged through the WTO is likely to have met a more cautious response from at least some of the EU member states, since the MAI's failure had led to an political acceptance (for example by the British government) of the need to start again with a 'blank sheet of paper'. However, the European Commission's stance was supported by Japan, which also proposed inclusion of investment in a new WTO negotiating round to be initiated in late 1999. As regards the US, it is possible that inclusion of an investment agreement as part of a more comprehensive WTO negotiation might make it easier to secure fast-track authority from Congress; at any rate, the European Commission's main concern was apparently that there might be scepticism in US quarters as to whether the WTO could arrive at 'high quality' investment rules. The primary aim of shifting to the WTO is clearly to involve a wider range of states than is possible at the OECD, even though the MAI was envisaged as a 'free-standing agreement', and 8 non-OECD states were participating in addition to the 29 OECD members by the time the negotiations ended. Certainly, the business lobbies which had pressed for the MAI made no secret that its main usefulness to them would be in relation to developing countries, and that their preferred forum would be the WTO (although it should be remembered that important recipients of investment such as China and Russia remain outside WTO).

If the issue is considered from a wider perspective than practical policy-makers generally allow themselves, more fundamental doubts emerge, both about the appropriateness of the WTO as a forum, and as to the MAI as a model. Reservations on the former point were expressed by Jagdish Bhagwati (1998), a strong supporter of the GATT/WTO and free trade. Bhagwati argued that liberalization of investment is qualitatively different from trade liberalization and should be approached much more cautiously; and that further expansion of the scope of the WTO might weaken its central mission[ 1].

My concerns are mainly with the second aspect: the unsuitability of the MAI model, and the need for a broader multilateral framework for the regulation of international investment. This would undoubtedly be an ambitious undertaking, but one that I argue is essential to realise the objective of establishing a sound multilateral framework with a greater degree of certainty and more competitive equality than is offered by the MAI's limited approach.

2. Ambitions and Limitations of the MAI

The basis of the draft MAI consisted of strong anti-expropriation provisions, coupled with general non-discrimination obligations, applied to very widely-defined categories of investments and investors. The anti-expropriation provisions would establish on a multilateral basis the stringent international standard for protection of foreign-owned assets which foreign investors have long sought. The general non-discrimination obligations are the most-favoured-nation (MFN) and national treatment (NT) standards which originated in reciprocal trade agreements and became multilateral and unconditional obligations in the GATT. Both the anti-expropriation and non-discrimination standards have become the basis of bilateral investment treaties (BITs), a growing network of which have been concluded since the 1960s, accelerating in the 1990s to over 1500 treaties by the beginning of 1997, according to the UNCTAD database (UNCTAD, 1998).

The draft MAI greatly extended the impact of these two basic obligations, in two major respects. Firstly, they were to apply in respect of very broad definitions of 'investors' (covering nationals and permanent residents) and of 'investments' (including all types of contractual rights and money-claims, whether directly or indirectly owned or controlled). Secondly, the NT provision was so drafted as to give foreign investors a right of entry; this is present in only a handful of the hundreds of BITs, mainly those concluded by the US since the mid-1980s, and even in these the right of entry is subject to scheduled exceptions which may be extended.

To these basic obligations were added other 'disciplines' on states, notably regarding transparency (requiring publication of relevant laws, policies and decisions of general application), performance requirements (prohibiting export, domestic content, domestic purchase, trade-balancing or foreign-exchange-balancing requirements), and employment and immigration laws (rights of temporary entry, stay and work of investors and their employees essential to the enterprise). The enforcement provisions envisaged both state-state and investor-state arbitration.

Thus, the MAI went well beyond the existing network of BITs in attempting to establish in effect a single area for the acquisition of assets and rights of all kinds. Its advocates argued that it would provide a predictable and transparent framework of laws and regulations affecting business. However, critics stressed that it gave investors and speculators rights without responsibilities, and imposed sweeping restrictions and limitations on national laws and regulations, and hence on state sovereignty. Its effects would be deregulatory, and its impact uncertain, since investors could challenge a wide range of existing and proposed national regulations if they could be argued to entail de facto discrimination or indirect expropriation. It would destabilise and weaken national regulatory capacity, and thus undermine rather than support measures to ensure that investment is directed to sustainable development (Picciotto and Mayne, 1999).

Indeed, as the MAI negotiations proceeded, the text expanded with the addition of a variety of special provisions and 'carve-outs', mainly to deal with the concerns expressed by specialists in particular areas of regulation when they were consulted about the draft. Notably, taxation was carved out (except for the expropriation provisions, although these excluded 'normal' taxation) since it is dealt with by the network of bilateral tax treaties; provisions to try to accommodate the MAI principles to the complex international intellectual property regime were being drafted; and a special section on financial services exempted prudential measures and laid down specific fair treatment rules for matters such as authorisation, membership of exchanges and regulatory bodies, and access to payments systems. In consultation with IMF experts, provisions were included allowing 'temporary safeguards' for serious balance-of-payments or external financial difficulties; but they appeared to exclude medium- or long-term measures to control short-term capital flows. The top-down character of the agreement meant that the negotiators tabled their proposed national exceptions lists, which became the focus of successive bargaining rounds in an effort to reach a 'balance of commitments', in the process of which the initial 'standstill and rollback' obligations appeared to become weakened.

In many ways, the MAI resembled a GATT for investments, requiring abolition of border barriers on investment inflows, and laying down broad non-discrimination criteria for internal regulations affecting investments. However, the original GATT balanced the broad liberalisation obligations with a substantial list of general exemptions in article XX, expressing areas of legitimate host state regulation. In contrast, the MAI negotiators aimed to keep general exceptions to a minimum, confined to 'essential security interests'. Following criticism of the draft agreement from a variety of 'civil society' organisations, a proposed clause was put forward on Non-Lowering of Standards, covering both environmental and labour standards; but it was not drafted as an exception. It would have precluded any relaxation of such standards only if made to attract a specific investment; a merely symbolic addition, since any such privileged treatment of an investor would in any case be contrary to the NT or MFN clauses.

3. From Negative to Positive Integration

The experience of the GATT indicates the importance of shifting from negative integration (the removal of barriers) to positive integration (the co-ordination or harmonisation of regulatory arrangements by reference to internationally agreed standards). Since the GATT became concerned with so-called 'non-tariff barriers', it has begun to develop techniques for harmonisation of internal regulations affecting trade in goods. In the WTO agreements states are encouraged to adopt internationally-agreed technical, safety, or health standards, to avoid charges of de facto discrimination. The TRIPs agreement goes further, in requiring WTO members to establish minimum levels of intellectual property protection.

A new framework to provide secure and stable conditions for global investments under conditions of competitive equality should aim to enhance national regulatory standards within a stronger system of harmonised rules and coordinated enforcement. This would link the rights of business to the fulfilment of responsibilities, and aim to strengthen state-level regulation through flexible linkages to internationally-agreed standards (Picciotto, 1998). A high priority should be to link liberalization and investment protection provisions, such as those envisaged in the MAI, to equally strong multilateral arrangements to strengthen international fiscal and financial regulatory cooperation. Many of these already exist in embryo, but they are greatly weakened by the reluctance of states to participate in them, or to enforce them rigorously, due to the fear of losing out in the competition to attract finance. Even the OECD's own multilateral treaty for cooperation in tax enforcement of 1988 has been ratified by only 8 states.

The problems posed by international avoidance of tax and financial regulations would be more easily overcome by accepting the principle that the advantages of an investment protection agreement should be open only to states which also accept the rules for cooperation in tax enforcement and elimination of harmful tax practices, and to investments coming from such participating states. Also included in such a package deal should be participation in systems for regulation of financial markets and prudential supervision of financial firms, as well as money-laundering and financial fraud. The arrangements which have been developed at the international level so far are far from perfect, but their inclusion in a broader multilateral framework would facilitate their acceptance and make it easier to strengthen them. This would reverse the presumption of the MAI, which would have encouraged the continued use of offshore centres and havens for tax and regulatory avoidance, by offering protection to investments even if routed through such jurisdictions.

A wide range of internationally agreed standards for business could also be included within such a framework, such as agreements to combat bribery and illicit payments, corporate governance and disclosure requirements, and marketing rules for products such as drugs, tobacco, or babyfood. These need not all form part of the basic package which states would be required to accept, but could be linked to it in various ways. For example, a firm's rights under investment protection rules could be conditional on its compliance with relevant business standards; thus, it could not complain of cancellation of a hospital supply contract if it could be shown to have breached rules on marketing of pharmaceuticals or babyfood. Principles of environmental protection, and minimum social and employment standards, could also be associated within the framework, by creating a presumption that an investor is responsible for ensuring compliance with such standards by the businesses involved with the investments. Such linkages need not require the inclusion of all these arrangements under the same institutional umbrella. However, the time is surely ripe for some rethinking of the roles and relationships of the international financial and economic institutions, and the lack of an organization responsible for regulating international investment and business standards is clearly a gap which needs to be filled.

Above all, what is needed is a recognition that globalization is not merely a matter of unrestricted market forces. It requires a strengthening of international standards and cooperative arrangements, to provide a basis of mutual confidence. Without such a strong foundation of positive standards, paper guarantees against discrimination or expropriation, or unfair treatment of any kind, would in any case be ineffectual or illusory.


1. In an article in Foreign Affairs, Bhagwati attributed the continued enthusiasm of key decision-makers and institutions for the concept of a free global capital market to the influence of a 'power élite' based on the Wall-Street/Washington nexus, dominated by individuals linked to the large investment banks (Bhagwati, 1998). When the MAI negotiations were suspended, he opposed transfer of the issue to the WTO in a letter to the Financial Times (22nd October 1998), on the grounds that this organisation should concentrate on trade issues, where all countries gain, and to add the inherently controversial MAI issue to its agenda would make it harder to resist pressures pulling the WTO into 'politically supercharged' domains such as labour and the environment.


Bhagwati, J (1998), 'The Capital Myth. The Difference between Trade in Widgets and Dollars', Foreign Affairs issue 77(3).

European Commission (1998), 'Discussion Paper: Trade and Investment, Note for the attention of the 113 Committee, European Commission DG-I, M.D.642/98' 15th December 1998.

French Government (1998), 'Rapport sur l'Accord multilatéral sur l'investissement (AMI), Rapport Intérimaire'. September 1998, Catherine Lalumière Députée européenne, Jean-Pierre Landau, Inspecteur général des Finances, Rapporteur: Emmanuel Glimet, Conseiller référendaire à la Cour des Comptes.

Picciotto, S (1998), 'Linkages in International Investment Regulation: The Antinomies of the Draft Multilateral Agreement on Investment', University of Pennsylvania Journal of International Economic Law issue Volume 19.

Picciotto, S and Mayne, R (1999), 'Regulating International Business. Beyond Liberalization', Basingstoke: Macmillan.

UNCTAD (1998), 'Bilateral Investment Treaties in the Mid-1990s', United Nations Conference on Trade and Development , Geneva.