Prepared by:
Anthony Chapman
Economics Division
September 1997





   A. Harnessing the Advantages of Globalization

   B. Managing the Pressures of Globalization

   C. Reducing the Complexity and Extending the Coverage of the Regime


   A. Scope of the Agreement

   B. Main Obligations of the Agreement

   C. Dispute Settlement

   D. Other Provisions


   A. Industrial Policy Goals

   B. Culture

   C. Health Care Services

   D. Environmental Standards

      1. Direct Effects

      2. Indirect Effects

   E. Application to the Provinces

   F. Helms-Burton Act





Negotiations on a Multilateral Agreement on Investment (MAI) were launched at the May 1995 Council meeting at Ministerial level of the Organisation for Economic Co-operation and Development (OECD) upon receipt of a report by two OECD committees. The Committee on International Investment and Multinational Enterprise (CIME) and the Committee on Capital Movements and Invisible Transactions (CMIT) had been conducting preparatory work on the MAI since 1991. Their report to the OECD Council stated "[T]he time is ripe to negotiate a multilateral agreement on investment (MAI) in the OECD." The OECD Council set the goal of concluding the MAI by the time of the May 1997 Ministerial. Subsequently, the deadline for completing the Agreement was extended to May 1998. Since the MAI negotiations were launched, considerable progress has been achieved on the elements of the Agreement. In the spring of 1997, several drafts of the Agreement - the latest dated May 1997 - were circulated to the public, raising considerable controversy about the extent to which the MAI would bind the hands of governments with respect to policy-making.

This paper’s first part summarizes the globalization of trade and investment which has occurred over the past several decades. The second part examines the reasons why governments are negotiating a multilateral investment agreement at this time. What are the existing international investment instruments, such as bilateral investment treaties, OECD conventions, and international trade agreements? How would an MAI improve the multilateral system? Third, the paper outlines the elements of the draft agreement. The fourth part examines some of the issues and areas of controversy surrounding the MAI. Would the MAI require the Canadian government to surrender policy-making authority in areas such as industrial development, culture, social services, and the environment? Would the MAI apply to provincial policies? The final section draws some conclusions about the MAI.


The term "globalization" describes the growing economic integration and interdependence of countries resulting from increased international trade in goods and services, the growth of cross-border capital flows, and the rapid diffusion of technology throughout the world. The globalization process has been driven by two main sets of factors: policy-initiated changes and technological advances.

On the policy side, since WWII deep reductions of barriers to the movement of goods, services, and capital have taken place under the auspices of the GATT/WTO, the IMF, and the OECD. An indication of the degree of trade liberalization over the period is that Canadian duties collected as a percentage of imports declined from more than 10% in 1955 to about 3% in 1992.(1) With respect to technological advances, progress in the areas of transportation and telecommunication have compressed economic distance while computer advances have reduced industrial coordination costs (see Table 1). These technological factors have allowed firms to locate production phases in the most advantageous global locations.

Table 1
Costs of Air Transportation, Telephone Calls, and Computer Price Deflator
(in 1990 U.S. dollars unless otherwise indicated)


Average Air
Revenue per
Passenger Mile

Cost of a
Three-Minute Call,
New York to London

U.S. Department of
Commerce Computer
Price Deflator





























Source:  Richard J. Herring and Robert E. Litan, Financial Regulation in the Global Economy, Brookings Institution, Washington, 1995, p. 14.

What effects have these policy initiatives and technology factors had on the world economy? First, world trade has expanded rapidly since 1950, growing by about 6% per year or about 50% faster than world output.(2) As a result, the ratio of merchandise trade to economic output has doubled over the period.(3)

Second, capital flows have exploded, especially since capital restrictions were loosened beginning in the 1970s. Financial market liberalization, the decline in transaction costs, and the creation of new financial instruments also played roles in stimulating the volume of cross-border security transactions. Cross-border transactions in bonds and equities in the major advanced countries rose from less than 10% of GDP in 1980 to well over 100% of GDP by 1995(4) (see Table 2).

Table 2
Cross-Border Transactions in Bonds and Equities
(as percent of GDP)









United States








































United Kingdom
















(1) Gross purchases and sales of securities between residents and nonresidents.
(2) January to September.
(3) For 1996, data are based on settlement.
(4) The figure is for 1982.

Source:  Bank for International Settlements (BIS).

"Foreign direct investment is a major force shaping globalization."(5) Beginning in the 1980s, foreign direct investment (FDI) increased rapidly. FDI outflows from all countries, which averaged US$76.8 billion between 1983-1987, more than quadrupled by 1995 to US$317.8 billion.(6) In fact, FDI outflows were 40% higher in 1995 than in the previous year. Developed countries accounted for 85% of FDI outflows and 65% of inflows.(7) It is estimated that 39,000 parent companies had a US$2.7 trillion stock of FDI invested in some 270,000 foreign affiliates by 1995.(8)

While developed countries are the major recipients of FDI, developing countries received about one-third of FDI inflows in 1995, or US$100 billion, with East and South-East Asian countries accounting for 62% of this amount. Developing countries have also become important sources of FDI outflows, contributing US$47 billion in 1995. In fact, Japan’s position as the largest source of FDI outflows in East Asia was overtaken by Hong Kong between 1993-95.

Table 3
Gross Foreign Direct Investment
Plus Portfolio Investment
(in percent of GDP)

  1970-74 1975-79 1980-84 1985-89 1990-95















































































United Kingdom






United States






(1) Sum of the absolute value of inward and outward foreign direct investment and portfolio investment.
(2) The figure is for 1990-94.

Source:  IMF, World Economic Outlook, May 1997, p. 60.


The reasons for negotiating an MAI can be addressed under three main headings: harnessing the advantages of globalization; managing the pressures of globalization; and reducing the complexity and extending the coverage of the international investment regime.(9)

   A. Harnessing the Advantages of Globalization

Attitudes towards foreign investment, particularly FDI, have changed markedly since the 1960 and 1970s when some governments, concerned about the extent of foreign ownership, established screening procedures to determine the desirability of each new foreign investment. For example, Canada’s Foreign Investment Review Agency (FIRA) established in 1974 required foreign investors to demonstrate that proposed investments in Canada were likely to be of "significant benefit" to Canada. Despite FIRA’s high approval rate of investment applications, the agency’s screening process may have deterred some FDI since foreign investors regarded the procedures as too cumbersome and rigid, leading to unreasonable demands and unnecessary delays.(10)

In 1985, FIRA was replaced by Investment Canada, which signalled a new, more receptive attitude toward foreign investment in Canada. FIRA’s requirement that a foreign investment be of "significant benefit" to Canada was replaced with a less onerous "net benefit" test by Investment Canada. In addition, the Investment Canada Act raised the asset threshold above which foreign acquisitions of Canadian firms and establishment of new businesses are reviewed. Although Investment Canada still reviews applications for foreign investments, it now also plays an active role in attracting foreign investment to Canada.

In the 1990s, governments actively compete to attract FDI, especially where this involves new investment in manufacturing. Concerns have even been raised that Canada is not getting its "fair share" of foreign direct investment.(11) Indeed, Canada’s share of world FDI declined from 11% in 1980 to 5% in 1994.(12) Over the same period, the share of the United States rose from 17% to 22%.(13)

Possible economic benefits from FDI inflows include job creation, increased economic output, increased exports, greater competition, enhanced productivity, higher wages, and stimulation of economic activity in supporting industries. It is estimated that every $1 billion in FDI creates 45,000 jobs within five years and boosts Canadian GDP by $4.5 billion.(14)

Increasingly, trade follows investment. Firms’ motivation for investing in foreign markets is no longer merely to jump over trade barriers to serve protected markets or to gain access to raw materials. Foreign investment provides the means for firms to get closer to their customers and to rationalize production internationally. Getting close to markets has become a more important consideration as services trade increases. Trade in services, such as engineering, or banking, often requires the commercial presence of the service provider. The GATS market access provisions explicitly recognize "commercial presence" as one mode of supply of services.

The reduction of trade and investment barriers and the revolution in communications, transportation, and computation have allowed firms to access production inputs from various locations throughout the world. It is not unusual for an automobile or a computer manufacturer to produce components in a number of different countries. Such production arrangements benefit the home country by making domestic firms more productive, potentially leading to greater sales. Since foreign affiliates typically rely on their parent company for components, supplies, and technical knowledge, this can generate more demand for intermediate goods and services from the home country.(15)

Of course, FDI outflows may cause the displacement of certain home country exports by production in the host country. Will the home country suffer an overall loss of exports? The answer lies in whether the increase in the foreign affiliates’ demand for intermediate goods or services from the home country offsets the initial displacement of home country exports. This will depend on the degree to which the foreign affiliates rely on the parent company for intermediate inputs and how much the firm’s total sales increase as a result of the investment.(16)

Canadian direct investment outflows have been significant over the past 30 years (Table 4). In fact, the stock of Canadian direct investment abroad (CDIA) has increased much faster than the stock of foreign direct investment in Canada (FDIC). Table 4 shows that CDIA grew from about 21% of the stock of FDIC in 1965 to about 95% in 1996. This large and growing stock of CDIA is a major reason why Canada should be interested in ensuring that foreign governments do not impose arbitrary or discriminatory conditions on FDI. From Canada’s standpoint, harnessing the benefits of foreign investment outflows is becoming as important a consideration as realizing the gains from inflows.

Table 4
Canada’s Foreign Direct Investment Position
(year-end stocks in billions of Canadian dollars)




































Source:  Statistics Canada, Canada’s International Investment Position, 1996.

There is growing recognition of the link between trade and investment. As Renato Ruggiero (Director General of the World Trade Organization) has stated,

[T]here can be no doubt that foreign direct investment has joined international trade as one of the primary motors – some would say the primary motor – of globalization, that is the organization of production and supply of goods and services on a global basis. Indeed, in today’s world economy, trade and investment are not merely increasingly complementary but also increasingly inseparable as two sides of the coin of this process of globalization.(17)

The interrelationship between trade and investment makes it apparent that "in today’s globally integrated economies, there really is no free trade without free FDI."(18) Therefore, policies designed to foster openness to competition must take into account foreign investment policies as well as trade policies. This suggests to some analysts the need for a multilateral investment agreement in parallel with multilateral trade rules.

   B. Managing the Pressures of Globalization

As noted earlier, views towards FDI have changed in the past several decades. Countries now actively compete to attract FDI, especially where this involves greenfield investment in manufacturing facilities. Sometimes this competition for FDI leads to the provision of subsidies or incentives by provinces, states, or national governments. Automobile manufacturers are frequent recipients of government largesse and there is some indication that the size of incentives provided to them has increased in the last ten years.(19) Although such subsidies may benefit firms, they are not necessarily in the interests of taxpayers; in addition, they distort the efficient international allocation of capital. Furthermore, competitive bidding to attract foreign investment always favours larger industrialized countries over smaller, poorer countries.

Another problem connected to the globalization of markets is the possibility of anti-competitive behaviour, such as the formation of cartels, at the international level. Although such schemes may be outlawed at the national level by antitrust legislation, they may not be adequately controlled at the global level. This raises the possibility of a need to regulate business behaviour at the international level as well.

Globalization of investment leads some to conclude that a level playing field is required with respect to the rules of corporate behaviour involving bribery, human rights, environmental standards, and labour issues. For example, United States legislation prohibits U.S. companies from bribing foreign officials; however, some other countries do not enforce the same requirements on their multinationals. With respect to labour, human rights, and the environment, the standards followed by multinational enterprises (MNE) may vary.(20) Therefore, MNEs whose home jurisdiction requires them to follow high ethical standards may have to operate at a disadvantage compared with certain competitors. There is also the concern that countries’ competition to attract investment may lead to a "race to the bottom" in national labour and environmental standards.

Another area of concern is the effect that trade and investment globalization may be having on the employment of unskilled workers and on distribution of income between skilled and unskilled workers in the industrialized countries. OECD work on industrialized countries’ trade with emerging economies found "clear evidence of a worsening in the labour market position of unskilled workers.…the possibility that trade with the [emerging economies] may have contributed to the labour market problems of unskilled workers in the OECD countries cannot be excluded on a priori grounds."(21) On the other hand, the OECD found that:

…there is still considerable divergence of views among economists about the employment effects of foreign direct investment. One key issue is the extent to which foreign direct investment abroad substitutes for investment at home. Another is the extent to which foreign direct investment stimulates increases of exports of intermediate goods as well as capital goods. Still another concerns the matter of whether the direct investment involves the construction of new plants or simply the acquisition of existing facilities.(22)

   C. Reducing the Complexity and Extending the Coverage of the Regime

The growing number of regional trade agreements is complicating the trading system with different sets of rules of origin, technical standards, tariffs, and other regulations. Some analysts suggest that "treaty congestion" may be eroding the benefits of trade liberalization.

Similarly, foreign investment issues are dealt with in a plethora of international agreements. A partial list includes: the OECD Code of Liberalization of Capital Movements, the OECD Code of Liberalization of Current Invisible Operations, the OECD Declaration and Decisions on International Investment and Multinational Enterprises, the OECD Draft Convention on the Protection of Private Property, the WTO, the NAFTA, the EU treaty and legislation, and the more than 900 bilateral investment treaties. As one analyst put it "[I]t is unlikely that the current patchwork quilt of investment rules will serve multinational enterprises (MNEs) operating increasingly complex businesses across multiple nation-state borders. Competing and sometimes conflicting, or simply vague, rules can create uncertainty in the treatment of foreign direct investment (FDI) by MNEs."(23)

Apart from the complexity, investment liberalization mechanisms in many of these agreements are relatively weak compared with trade agreements that establish time-tables for progressive liberalization.(24) For example, the OECD Codes rely upon a standstill and ratchet approach to investment liberalization. Countries acceding to the OECD Codes agree to freeze their existing investment regime and to undertake a general obligation for progressive liberalization; however, further liberalization is undertaken unilaterally and voluntarily by signatories, albeit with encouragement and peer pressure playing a role.

Three WTO agreements deal with investment issues – the General Agreement on Trade in Services (GATS), the Agreement on Trade-Related Investment Measures (TRIMs), and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs). The GATS contains obligations concerning two modes of supply of services -- commercial presence and movement of the supplier. The TRIMs is concerned with a fairly narrow class of investment performance requirements, those that distort trade in goods. The TRIPs provides enforcement under the WTO of intellectual property protection, which is an important investment consideration for companies transferring sophisticated technology.

The NAFTA deals with FDI in chapters on investment (Chapter 11), general services (Chapter 12), financial services (Chapter 14), and intellectual property rights (Chapter 17). NAFTA Chapter 11 provides a clear rules-based regime for FDI based on non-discriminatory treatment of foreign investors (national treatment and most favoured nation). Like the WTO, the NAFTA limits the use of performance requirements. However, the NAFTA goes beyond banning performance requirements which simply distort trade in goods (specified export levels, minimum domestic content, preferences for domestic sourcing, and trade balancing) by also prohibiting performance requirements for technology transfer and product mandating.

Moreover, NAFTA goes well beyond the WTO by providing impartial treatment of a foreign (NAFTA) investor with respect to the establishment, operation, and disposition of an investment in another (NAFTA) country. It also prohibits expropriation by a NAFTA country of an investment by a NAFTA investor except for a public purpose, on a non-discriminatory basis, in accordance with due process, and with fair market value compensation. Another important element in NAFTA is the detailed mechanism for the resolution of disputes, including the option of binding investor-state arbitration.

In sum, the multilateral system would benefit from a single overarching multilateral investment agreement. Not only would an MAI reduce the complexity of the patchwork quilt of bilateral and plurilateral agreements, but it would strengthen and extend existing multilateral rules which are less comprehensive than certain plurilateral agreements, such as NAFTA.


The MAI’s structure can be grouped under four main headings: scope; obligations; dispute settlement; and other provisions. The agreement’s scope establishes how broadly or narrowly the agreement is interpreted -- for example, by defining key terms, such as "investor" and "investment." The agreement’s obligations establish the rules, such as non-discrimination and performance requirements, that the signatories undertake. The dispute settlement section provides a means of resolving Contracting Parties’ differences of interpretation concerning the agreement’s scope and obligations. Under "Other provisions" are summarized the rules connected to the preparation for, and the operation of, the MAI as well as the method for accession to, and withdrawal from, the Agreement.

   A. Scope of the Agreement

The scope of the MAI would be very broad. Initially, some thought that the MAI would cover only foreign direct investment undertaken by enterprises. However, the MAI draft(25) defines "investor" as either (a) a natural person (whether a national or a permanent resident) or (b) an enterprise (legal person or any other entity organized under the applicable law of a Contracting Party). "Investment" includes every kind of asset controlled, directly or indirectly by an investor, (i.e. a direct investment, portfolio investment (whether debt or equity), real estate, intellectual property rights, rights under contract, and rights conferred by authorizations or permits.)

The MAI draft covers both the entry of the investment (or pre-establishment phase) and the investment once in place. "This is a major element of value-added compared with most bilateral investment treaties which are limited to the protection of investment after they are made."(26) The MAI draft covers investment made "cross-border" and by foreign investors resident in the country. The MAI is expected to encompass all economic sectors, including agriculture, natural resources, manufacturing, and services. The Agreement may cover all government measures (laws, regulations, and administrative practices) by all levels of government (central, federal, state, provincial, and local). It would be retroactive in the sense that it would apply to investments made prior to its entry into force.

The MAI takes a top down, rather than a bottom up, approach to liberalization. In other words, a sector is covered by the Agreement unless it is specifically excluded. There are five types of provisions in the Agreement that would permit Parties to derogate from the MAI’s principles: general exceptions, carve-out/carve-in, temporary derogations, prudential measures, and national reservations.

General exceptions provide signatories with an exemption from all (or almost all) aspects of the Agreement, including standstill, national treatment, and most favoured nation. The draft MAI includes exceptions for reasons of national security, public law and order, and maintenance of international peace. A proposal by France to include an exception for cultural industries is also under discussion.

Carve-out/carve-in means that nothing in the Agreement applies except as expressly provided. This approach applies to the treatment of taxation.

Temporary derogations from the free transfer of payments in connection with current account and capital transactions are permitted to address serious balance of payments problems.

Prudential measures enable Parties to take measures necessary to ensure the stability of their financial sectors.

National reservations are the list of all non-conforming measures that Parties maintain at the time the MAI is signed or when they accede to the Agreement. A Party would lodge its reservations by listing the Articles (e.g. national treatment, MFN, etc.) which did not apply to the measures listed in its Schedule to Annex A of the Agreement. (Canada has lodged reservations similar to those found in NAFTA Annex I and Annex II.)(27)

   B. Main Obligations of the Agreement

Non-discrimination, which is central to the obligations contained in the MAI, would be established by means of the principles of national treatment and most favoured nation treatment. National treatment means that foreign investors of another Contracting Party may not be treated less favourably than national investors with respect to the entry of foreign investment as well as to the operation, management and sale of the investment once it is established. Most favoured nation (MFN) treatment means that a Contracting Party may not treat investors and investments of another Contracting Party less favourably than investors from any other country.

Transparency would require Contracting Parties to publish promptly and make available its laws, regulations, procedures, rulings, and international agreements that might affect the operation of the MAI.

Temporary Entry would require Contracting Parties to grant temporary entry and authorization to work to foreign investors and employees of foreign enterprises from another Contracting Party. Spouses and children of investors and employees would also have to be granted temporary entry.

Senior Management and Boards of Directors - Contracting Parties could not require foreign investors from another Contracting Party to appoint nationals to senior management positions or to Boards of Directors.(28)

Employment Requirements - A Contracting Party could not require investors or enterprises from another Contracting Party to employ nationals.

Performance Requirements - A Contracting Party could not require certain performance requirements from investors or enterprises from another Contracting Party. The list of prohibited performance requirements is the following:

a) to export a given level of goods;

b) to achieve a given level or percentage of domestic content;

c) to favour the purchase of domestically produced goods;

d) to relate the amount of imports to the amount of exports or to the amount of foreign exchange from an investment;

e) to restrict the domestic sale of goods or services by foreign enterprises to the level of exports or foreign exchange;

f) to transfer technology , a production process, or other proprietary knowledge except when imposed as part of a ruling respecting national competition laws or to transfer intellectual property rights;

g) to locate a headquarters in the Contracting Party;(29)

h) to provide an exclusive product mandate for the world or for a certain region;

i) to achieve a certain level of production, investment, sales, employment, or research and development in a Contracting Party;

j) to hire a given level of local personnel;

k) to establish a joint venture;(30)

l) to achieve a minimum level of local equity participation.

Paragraph 2 states that the ban on performance requirements set forth in paragraphs 1(f) through 1(l) would not apply with respect to the "receipt of an advantage" in connection with an investment.(31) In other words, these performance requirements (involving transfer of technology, locating headquarters, product mandating, production, investment, sales, employment, and R&D targets, hiring of nationals, joint venturing, and equity participation) would still be permitted where compliance was encouraged by means of investment incentives.

Paragraph 3 states that paragraphs 1(b), 1(c), 1(d), and 1(e)(32) would not prevent a Party from providing an advantage to an investor to locate production, provide particular services, train or employ workers or employees, construct or expand particular facilities, or carry out R&D.

Paragraph 4 states that paragraphs 1(b) and 1(c) would not prevent a Party from adopting or maintaining measures necessary to enforce laws, to protect human, animal or plant life or health, or to conserve exhaustible natural resources.

Paragraph 5(a) states that paragraphs 1(a), 1(b), and 1(c) would not apply to qualification requirements for goods or services with respect to export promotion (and possibly foreign aid) programs.

Paragraph 5(b) states that paragraphs 1(b), 1(c), 1(f), and 1(h) would not apply to procurement by a Party or state enterprise.(33)

Paragraph 5(c) states that paragraphs 1(b) and 1(c) would not apply to requirements imposed by an importing Party relating to the content of goods necessary to qualify for preferential tariffs or preferential quotas.

Paragraph 5(d) states that paragraph 1(i) would not apply to requirements imposed by a Contracting Party as part of privatization operations.(34)

Privatization - the national treatment and MFN obligations would apply both to privatizations and to subsequent transactions involving the privatized asset.(35)

Monopolies - nothing in the MAI would prevent the establishment or maintenance of a monopoly. Non-discriminatory treatment would be accorded in the designation or maintenance of a monopoly by a national or subnational government.

Incentives - the national treatment and MFN treatment principles would apply to the granting of investment incentives. Consultations could be initiated where a Contracting Party considered that its investors had been adversely affected by an incentive. Further negotiations would be held within three years "in order to further avoid and minimize distorting effects and to avoid undue competition between Contracting Parties in order to attract or retain investments."(36)

Corporate practices - There is no text here yet but the MAI Commentary states that there is general agreement that non-government imposed discriminatory corporate practices would not be covered by the MAI.

Technology R&D - There is no text here yet but Canada has proposed that funding prerogatives relating to R&D consortia and other activities would not preclude national treatment for membership in such activities, provided that foreign participants contributed commensurate funding.

Intellectual Property - There is no proposed text yet but there have been discussions concerning: the concept of intellectual property in the definition of investment; whether national treatment, MFN treatment, and general treatment would apply; and the application to expropriation and transfers, performance requirements, monopolies, dispute settlement, and other issues.

Public Debt - The MAI would not apply to the rescheduling of government debt.

Not Lowering Standards - A Contracting Party should (shall)(37) not waive or derogate from health, safety, environmental, or labour standards in order to encourage foreign investment. If a Contracting Party considered that another Contracting Party had lowered standards to encourage foreign investment, it would be able to request consultations with a view to avoiding the practice.

General Treatment - Each Contracting Party would have to provide foreign investments from another Party with fair and equitable treatment and full protection. Treatment would have to be no less favourable than required by international law. Investments could not be impaired by unreasonable and (or) discriminatory measures.

Expropriation and Compensation - A Contracting Party could not expropriate or nationalize an investment of another Contracting Party’s investor except:

(a) for a purpose in the public interest;

(b) on a non-discriminatory basis;

(c) with due process of law; and

(d) with prompt, adequate, and effective compensation.

Protection from Strife - In the event of war or civil disturbance, investors from another Contracting Party would have to be granted restitution on a national treatment and MFN treatment basis.

Transfers - A Contracting Party would have to ensure that all payments relating to an investment were freely transferable in and out of its territory.

Subrogation - A Contracting Party would have to recognize the assignment of rights and claims to an investor by a designated agency in another Contracting Party and the right of the latter Contracting Party to exercise by virtue of subrogation any such right and claim to the same extent as its predecessor in title.

Protecting Existing Investments - The MAI would apply to investments made prior to the Agreement’s entry into force as well as to investments made thereafter. The MAI would not apply to claims arising out of events that occurred prior to the Agreement’s entry into force.

Exceptions and Safeguards - The MAI would:

  • not prevent Parties from taking actions necessary to protect essential security interests, including actions taken in time of war, relating to the non-proliferation of nuclear devices, and relating to the production of arms and ammunition;

  • not require disclosure of information contrary to security interests;

  • not prevent taking action in pursuance of UN Charter obligations; and

  • not prevent taking action for the maintenance of public order.

A Contracting Party could request consultations where it considered that another Contracting Party had taken actions not in conformity with provisions of this Article.

Financial Services - The MAI contains specific financial services provisions, covering prudential measures, recognition arrangements, authorization procedures, transparency, information transfer and data processing, membership of self-regulatory bodies and associations, payments and clearing systems/lender of last resort, and dispute settlement.(38)

Taxation - The MAI would not apply to taxation measures except for expropriation, transparency, and dispute settlement provisions.

   C. Dispute Settlement

Under the MAI, Contracting Parties would have two ways to address an alleged breach of the Agreement: (1) state-state arbitration and; (2) investor-state arbitration.

(1) State-state arbitration requires that Contracting Parties should first try to resolve a dispute through consultations. If consultations were unsuccessful, a Contracting Party would be able to submit the dispute to an arbitral tribunal. The tribunal would consist of either three or five members. Three tribunal members would be selected by agreement of the Contracting Parties. Either Party could choose the option of a five-member tribunal. The MAI would set out rules and procedures for state-state arbitration. Decisions by tribunals would be final and binding on Contracting Parties to the dispute. Possible remedies that a tribunal could include in an award are:

(i) a declaration that an action was in contravention of obligations under the Agreement,

(ii) a recommendation that a Contracting Party should bring its actions into conformity with its obligations under the Agreement,

(iii) grant of pecuniary compensation, or

(iv) grant of any form of relief consented to by the Contracting Party against whom the award was made, including restitution in kind.

(2) Investor-state arbitration provides a dispute settlement mechanism that investors could activate. The investor would have the option of having the dispute settled in one of the following venues:

(a) any competent court or administrative tribunal of the Contracting Party to the dispute;

(b) in accordance with any dispute settlement procedure agreed upon prior to the dispute arising;

(c) by arbitration under:

(i) the Convention on the Settlement of Investment Disputes between States and Nationals of other States (the "ICSID Convention"),

(ii) the Additional Facility Rules of the Centre for Settlement of Investment Disputes ("ICSID Additional Facility"),

(iii) the Arbitration Rules of the United Nations Commission on International Trade Law ("UNCITRAL"), or

(iv) the Rules of Arbitration of the International Chamber of Commerce ("ICC").

   D. Other Provisions

The Preparatory Group comprising Signatories to the Final Act and Signatories to the Agreement would:

(a) prepare for the entry into force of the Agreement and the establishment of the Parties Group;

(b) conduct discussions with non-signatories to the Final Act;

(c) conduct negotiations with interested non-signatories to the Final Act and make decisions on their eligibility; and

(d) other possible work.(39)

The Parties Group comprising the Contracting Parties would facilitate the operations of the Agreement by:

(a) carrying out functions assigned to it under the Agreement;

(b) clarifying the interpretation or application of the Agreement;

(c) considering any matter that might affect the Agreement’s operation; and

(d) taking such other actions as it deemed necessary to fulfil its mandate.

The Parties Group would elect a Chair; meetings would be held at intervals to be determined by the Parties Group; rules would be established by the Parties Group; decisions would be made by consensus but, where a consensus could not be reached, decision would be by majority. The Parties Group would be assisted by a Secretariat.

Signature - The Agreement would be open for signature until [unspecified date] by Signatories of the Final Act and thereafter until entry into force by any State which possessed full autonomy on matters covered by the Agreement and which was willing to take on the Agreement’s obligations.

Accession - The Agreement would be open for accession by any State, regional economic integration organization, or any separate customs territory which possessed full autonomy on matters covered by the Agreement and which was willing to take on the Agreement’s obligations.

Non-Applicability - The Agreement would not apply between any Contracting Party and any acceding Party if, at the time of accession, the Contracting Party did not consent to such application.

Review - The Parties Group could review the Agreement when it determined.

Amendment - Any Contracting Party could propose to the Parties Group an amendment to the Agreement.

Withdrawal - Any time after five years from the entry into force of the Agreement for a Contracting Party, that Party could withdraw from the Agreement upon six months' notice. The Agreement’s provisions would continue to apply to existing investments for a period of 15 years from the date of notification of withdrawal.


   A. Industrial Policy Goals

One of the major criticisms of the MAI has been that it would prevent governments from using investment policy to promote industrial policy goals, such as job creation, export encouragement, technology transfer, and national ownership.(40) As noted earlier, the MAI does propose restricting a whole series of performance requirements aimed at achieving some of these goals. Certain performance requirements (i.e. export targets, domestic content, domestic purchasing, trade balancing, linking domestic sales to the level of exports or foreign exchange) distort trade in goods. In general, these trade-distorting policies contravene GATT Article III (national treatment) or GATT Article XI (quantitative restrictions) and have been explicitly prohibited by the Uruguay Round TRIMs agreement and by NAFTA.

The MAI also proposes to restrict certain performance requirements that are not directly related to international trade. The MAI would prohibit governments from imposing performance requirements on investors involving: technology transfer, location of headquarters, product mandating, production targets, investment targets, sales targets, employment targets, R&D targets, hiring of nationals, joint venturing, and equity participation. (The NAFTA already prohibits performance requirements related to technology transfer and product mandating).

However, it is important to recognize that the MAI would not prohibit performance requirements in all circumstances. First, the MAI would permit governments to set certain performance requirements in connection with the receipt of an advantage, often offered in the form of an incentive, such as a tax break or a subsidy. Performance requirements involving: technology transfer, location of headquarters, product mandating, production targets, investment targets, sales targets, employment targets, R&D targets, hiring of nationals, joint venturing, and equity participation could all be accomplished by means of incentives. In accordance with the national treatment requirement, incentives would have to be equally available to both national and foreign firms.

Even certain trade-distorting performance requirements (domestic content, domestic purchasing, trade balancing, and tying domestic sales to exports) would be permitted when undertaken by means of incentives and providing they related to policies connected to:

  • the location of production;
  • the provision of services;
  • the training or employment of workers;
  • the construction of particular facilities; and
  • the conduct of research and development.

Other provisions would provide exceptions from the performance requirements necessary to enforce laws, to protect human, animal or plant life or health, and to conserve exhaustible natural resources. In addition, there are exceptions for export promotion programs, government procurement, and preferential tariffs.

Apart from these exceptions, countries have lodged national reservations for specific measures under various MAI articles. Canada has lodged reservations in the MAI similar to those taken in NAFTA. Importantly, Canada retained the right under NAFTA to set certain performance requirements in connection to Investment Canada reviews of foreign investment. Similarly, under the proposed MAI reservation, Canada would be able, in connection with an Investment Canada review, to require companies: to transfer technology; to locate production; to carry out R&D; to employ or train workers; and to construct or expand particular facilities. Canada intends to take other reservations from the MAI performance requirements in connection with: Auto Pact duty waivers; oil and gas development; aboriginal affairs; minority affairs; and maritime transportation. With respect to performance requirements involving aboriginal affairs, minority affairs, and maritime transportation, Canada would reserve the right to adopt or maintain any measure in these areas.

   B. Culture

Canada regards the protection of cultural industries as key to maintaining a Canadian identity. Under the Investment Canada Act, the Canadian government has the power to review all acquisitions, or the establishment of new businesses, relating to Canada’s cultural heritage or national identity. Cultural businesses include producing, distributing, selling or exhibiting film or video products or audio or video music recordings as well as producing, distributing or selling books, magazines, periodicals, newspapers or music in print or machine-readable form.

Canada assiduously pursued exemption for cultural industries from the provisions of the Canada-U.S. Free Trade Agreement (FTA) and the exemption was carried forward into the NAFTA. The United States, on the other hand, regards cultural industry products as important exports and retained the right under the FTA and the NAFTA to retaliate in the event that Canada takes actions in this area that are inconsistent with the Agreement.

Culture is one of the most contentious areas of the MAI negotiations. At least three countries (Canada, France, and Belgium) are seeking an exception clause for cultural industries. The French government’s commentary attached to the MAI’s draft exception clause states that without a general exception for cultural industries, sectors using new technologies could not be protected because of the MAI’s standstill provision. Similarly, linguistic and/or nationality criteria in the audio visual and press sectors would contravene the MAI’s national treatment and most favoured nation treatment provisions, according to the commentary. The exception clause for cultural industries proposed by the French government reads as follows:

Nothing in this agreement shall be construed to prevent any Contracting Party to take any measure to regulate investment of foreign companies and the conditions of activity of these companies, in the framework of policies designed to preserve and promote cultural and linguistic diversity.(41)

The United States strongly opposes the inclusion of a cultural exception in the MAI, as the following comments by U.S. officials illustrate.

We are especially concerned about an open-ended exception for any type of economic activity that a country might deem to be cultural. This would include everything from telecommunications and broadcasting to books and literary works. …That is a major problem for us.(42)


The thorniest [issue] now under negotiation include[s] a proposal by the French, the Canadians, and the Belgians seeking a broad exception to the agreement for cultural industries. This is of great concern to the United States, and we have made it very clear that this will be a deal-breaker for us in the negotiations.(43)

Despite U.S. opposition, the Canadian government has stated that, as in NAFTA, Canada will retain, through an exception, the ability to protect its cultural industries.(44)

   C. Health Care Services

Some people have suggested that Canada’s public health care system would be threatened by the MAI.(45) Although the grounds for this assertion are not explicitly stated, they may be the MAI’s national treatment and privatization provisions. The national treatment provision would require government to treat foreign investors no less favourably than domestic investors in regard to the establishment, acquisition, expansion, operation, management, and sale of investments. The privatization provision would require that national treatment and MFN treatment be applied "to all kinds of privatization" and to "subsequent transactions involving a privatized asset."

Under the Canada Health Act, basic health care must be provided on a non-profit basis. As a result, most health care expenditures are made by the public sector. Under the MAI (as under the NAFTA) national treatment does not apply to procurement by a government or state-owned enterprise.(46) Health care facilities management services and nursing homes are examples of areas where foreign companies could invest. However, the Canadian government has lodged reservations with respect to health care and other social services similar to those in NAFTA.

NAFTA exempts non-conforming measures set out in Annex I and Annex II from the requirements of national treatment, MFN treatment, performance requirements, and senior management and boards of directors provisions. Under Annex I, all existing non-conforming measures are grandfathered but once liberalized cannot be made more restrictive. Provinces and states were given two years to describe their non-conforming measures.(47) Under Annex II, both existing non-conforming measures and new or more restrictive measures are exempt (i.e. the standstill and ratchet effects do not apply). Annex II lists social services (including health) as exempt from NAFTA’s requirements on national treatment (investment and services), MFN treatment (services), local presence (services) and senior management and boards of directors (investment). Annex II’s reservations apply to both the federal and provincial levels of government.

Canada’s proposed MAI reservation for social services follows closely the one set out in NAFTA. Canada has lodged a reservation for social services from the MAI’s obligations on national treatment, MFN treatment, senior management and boards of directors, and other as yet unspecified articles. As under NAFTA, the reservation specifies that Canada reserves the right to maintain existing social service policies or to adopt new policies. One difference from NAFTA is that Canada’s proposed reservation for social services would apply only to the federal level of government, whereas the NAFTA reservation applied both to the federal and provincial levels. The extent to which the provinces would be covered by the MAI is unclear at this stage.(48)

   D. Environmental Standards

Three parts of the MAI draft text contain references to environmental standards. First, the preamble contains the (bracketed) resolution "to implement this agreement in a manner consistent with environmental protection and conservation." The preamble also states in brackets, a "commitment to the Rio Declaration on Environment and Development and Agenda 21," and the recognition "that investment, as an engine of economic growth, can play a key role in ensuring that growth is sustainable when accompanied by appropriate environmental policies to ensure that it takes place in an environmentally sound manner."

The MAI’s second reference to the environment is found in the performance requirements article (paragraph 4). This section states that Parties would not be prevented by the ban on domestic content requirements or the ban on domestic purchasing requirements from adopting or maintaining environmental measures:

"(a) necessary to secure compliance with laws and regulations that are not inconsistent with the provisions of this agreement;

(b) necessary to protect human, animal or plant life or health; or

(c) necessary for the conservation of living or non-living exhaustible natural resources."(49)

The MAI’s third reference to the environment is found in the Article "Not Lowering Standards." This Article would require Parties to recognize that it is inappropriate to encourage investment by lowering health, safety, or environmental standards or by relaxing labour standards. A Party should (shall)(50) not waive or otherwise derogate from, or offer to waive, standards in order to encourage the establishment, acquisition, expansion or retention of an investment or investor. A Party could request consultations if it considered that another Party had offered such an encouragement.

Concerns have been raised about the possibility that the MAI might result in lower environmental standards. In general, this effect might arise in two ways: (1) directly, by forcing government to change environmental standards that contravened specific MAI provisions; (2) indirectly, by facilitating international capital flows, causing a race to the bottom in environmental standards in order to compete for investment.

      1. Direct Effects

According to some analyses, certain government environmental regulations could contravene the MAI. A U.S. report prepared for the Western Governors Association found that western state environmental laws might run afoul of MAI provisions respecting national treatment, expropriation, performance requirements, and incentives.(51) The following areas of state environmental and conservation laws were cited by the report: limits on the use of state lands; limits in the development of private land; regulation of oil shipments; incentives for investment in pollution and control equipment; and incentives for investment in recycled materials markets.

These concerns about the MAI’s effect on U.S. state policies appear to be unfounded, however. The U.S. government’s list of proposed reservations would exempt all existing non-conforming measures (in all sectors) in states and localities from the MAI obligations of national treatment, MFN treatment, performance requirements, and senior management and boards of directors. In addition, in respect to national treatment and MFN treatment, the United States would reserve the right to adopt or maintain any measures relating to subsidies or grants.

In Canada, concern about the impact of the MAI on environmental regulation has been due, in part, to a challenge brought under NAFTA’s investment chapter. The challenge has been mounted by U.S.-based Ethyl Corporation to Bill C-29, the Manganese Based Fuel Additives Act, that bans the importation and interprovincial sale of the gasoline additive methylcyclopentadienyl manganese tricarbonyl (MMT). Ethyl Corporation in the United States, which is the sole manufacturer of MMT, exports the additive to its plant in Carruna, Ontario, where it is blended with gasoline. The Canadian government claims that MMT presents a health and environmental hazard and that it damages automobile emission control systems. Ethyl Corporation argues there is no evidence to support these claims and the company charges that the legislation breaches Canada’s NAFTA investment obligations with respect to expropriation and compensation, performance requirements, and national treatment.

Some argue that the MAI, by incorporating investment obligations similar to those in NAFTA, would accelerate corporate challenges to Canadian environmental laws.(52) However, Bill C-29 is probably not a good test of the compatibility of Canada’s environmental laws with NAFTA or the MAI. Rather than banning the manufacture, sale or importation of MMT under the authority of the Canadian Environmental Protection Act (CEPA), the Canadian government opted instead under Bill C-29 to impose trade restrictions. The reason for this is that the government did not believe that MMT meets CEPA’s definition of a toxic substance, according to which a substance is toxic if it has a harmful effect on, or constitutes a danger to, the environment, or constitutes a danger to human life or health.(53) The former Minister for International Trade, the Honourable Arthur Eggleton, stated in a letter to then Minister of the Environment, the Honourable Sergio Marchi, that one reason that an import prohibition on MMT would be inconsistent with Canada’s obligations under the WTO and the NAFTA was that the restriction could not be justified on health or environmental grounds.(54)

The MAI’s preamble exhorts the Parties to implement the agreement "in a manner consistent with environmental protection and conservation." It is unclear whether the agreement’s preamble has any legal force or is merely hortatory. It seems unlikely, however, that the preamble would outweigh the agreement’s basic obligations to provide non-discriminatory treatment (national treatment and MFN treatment) and fair and equitable treatment (general treatment). On the other hand, any environmental exception clause (if one were included in the MAI) would likely require (as do the WTO and the NAFTA) that derogations from MAI obligations for environmental reasons be justified on health or safety grounds on the basis of current scientific evidence. According to the Canadian government, the MMT prohibition could not be justified on such grounds.

      2. Indirect Effects

It has been argued that by facilitating international capital flows, the MAI would increase the competition for foreign investment. According to some, such competition would hasten a "race to the bottom" as countries lowered environmental and other standards in order to attract foreign investment.(55) Although this argument has been heard often in respect to both trade and investment liberalization, it is difficult to substantiate. Anecdotal evidence suggests that when host country standards are lax, foreign affiliates may respect their home country’s higher standards.(56)

As noted above, the MAI draft contains a proposed Article to the effect that Contracting Parties should (or shall) not lower health, safety, environmental, or labour standards in order to encourage foreign investment. There is a consultative mechanism for when a Party considers that another has contravened this provision. The legal force of this provision will depend on the final language agreed upon - i.e., whether Contracting Parties should not lower standards or Contracting Parties "shall not" lower standards.

In any case, there is scant evidence of pressure for countries to lower environmental standards in order to encourage foreign investment. A survey of the literature does not support the idea that national differences in environmental regulations have been a major factor in changing the international pattern of location of "dirty" industries. "More stringent regulations in one country are thought to result in loss of competitiveness, and perhaps industrial flight and the development of pollution havens; however, the many empirical studies that have attempted to test these hypotheses have shown no evidence to support them."(57) Absent a tendency for firms to migrate to pollution havens, there is no reason for countries to engage in competitive environmental deregulation resulting in a "race to the bottom."

One reason may be that for most industries, environmental compliance costs represent a relatively small fraction of total costs. A study done for the U.S. Trade Representative found that pollution abatement costs average only 1.1% of value added for all U.S. industries and 86% of industries have abatement costs of 2% or less.(58) A study by Dun and Bradstreet Canada for Environment Canada arrived at similar results. The study found that 80% of Canadian companies surveyed spent between 0% and 2% of their budgets on environmental protection.(59) "Overall, current environmental regulations do not appear to be adversely affecting the competitive position of business within Canada."(60)

Another reason not to migrate to pollution havens is that MNEs may wish to avoid tarnishing their reputations by using environmentally unsound production processes. Also if the host country’s environmental standards are expected to rise in the future, it may be advantageous to anticipate this by importing the latest technology immediately, rather than retrofitting the plant at a later date.

   E. Application to the Provinces

As noted earlier, negotiators intend the MAI to cover practically all government measures (laws, regulations, and administrative practices) by all levels of government (central, federal, state, provincial, and local). The Canadian government says that extensive consultations have been conducted with the provinces throughout the MAI negotiations.(61) However, it is unclear at this stage whether negotiators will succeed in extending the MAI’s application to sub-national levels of government.

An issue that needs to be resolved is

… whether the treatment accorded to foreign investors by a sub-federal state or province would meet the national treatment test only if it were no less favourable than the treatment accorded to the investors of the same state or province, or whether it would be sufficient to accord treatment no less favourable than that accorded to the investors from any other state or province. The question will need to be answered by the Negotiating Group in due course.(62)

The EU has proposed that the national treatment article be amended to state that a sub-federal entity that accorded its own investors and their investments more favourable treatment than it accorded to investors and investments from other sub-federal entities of the same Party would have to extend the more favourable treatment to investors of the other Contracting Parties. If accepted, this amendment could theoretically mean that foreign investors would be treated more favourably than investors from another province or state of the same country.

The Canadian government has indicated that the MAI’s application to measures under provincial jurisdiction would depend on achievement of a satisfactory overall balance of rights and obligations in the MAI. If the final agreement does cover areas under provincial jurisdiction, individual provincial governments will need to decide whether, or to which measures, the MAI would apply. The provinces would be able to lodge reservations in regard to non-complying measures.

   F. Helms-Burton Act

In March 1996, U.S. President Bill Clinton signed into law the Cuba Liberty and Democratic Solidarity ("LIBERTAD") Act of 1996, otherwise known as the Helms-Burton Act. Among the Act’s provisions are elements that:

(a) give U.S. citizens the right to sue foreign nationals who traffic in property confiscated by the Castro government and claimed by those citizens;

(b) bar visas to the United States for foreign nationals who traffic in confiscated property;

(c) forbid financing by U.S. banks of transactions involving expropriated property subject to a U.S. claim;

(d) codify existing U.S. sanctions against Cuba; and

(e) urge the President to pursue an international embargo against Cuba and sanction countries that continue to trade with Cuba.

Canada has protested the extraterritorial reach of the Helms-Burton Act and has launched a campaign to oppose the legislation. In January 1997, amendments to Canada’s Foreign Extraterritorial Measures Act (FEMA) entered into force. The FEMA amendments will ensure that judgments under the Helms-Burton Act will not be enforced or recognized in Canada and will permit Canadians to "clawback" in Canadian courts U.S. awards or court costs and damages incurred under Helms Burton. Canada is also participating as a third party in the EU’s challenge of the Helms Burton legislation at the WTO. Canada has held consultations with the United States under NAFTA and has raised the issue in international organizations, such as the Organization of American States and the OECD.

The Canadian government has taken a strong stand in MAI negotiations against the Helms Burton legislation.

This legislation strikes at the heart of [MAI] objectives: it removes protection for foreign investors in the United States, it interferes with property rights in an arbitrary and capricious manner, and asserts a U.S.-specific exception of breath-taking scope from the standards of the agreement and customary international law. By undermining the security of foreign investment it will reduce investment, lower income and reduce employment.(63)


The Multilateral Agreement on Investment, if it is to achieve the goals set out in the Ministerial decisions which launched these negotiations, must, in the Canadian view, address the issues that provide a legal and policy basis for these measures, including, in particular, the investment related aspects of extraterritoriality, secondary boycotts, and movement of key personnel. In addition, the national security exception must be narrowly drawn, its invocation requires justification in terms of specific criteria and must be fully justifiable.(64)

There has been virtually unanimous support among OECD members for Canada’s position that the MAI should prohibit boycotts of firms that invest in third countries.(65) The EU has submitted a draft article on secondary investment boycotts (based on a Canadian proposal) that states: "No Contracting Party may take measures that (i) either impose or may be used to impose liability on investors or investment of investors of another Contracting Party; (ii) or prohibit, or impose sanctions for dealing with investors or investment of investors of another Contracting party …"(66)


Driven by technological change and policy initiatives, globalization of trade and investment is a reality. The growth in international investment flows has been extremely rapid in the last 20 years as a result of the lifting of capital restrictions, financial market liberalization, the decline in transaction costs, and the creation of new financial instruments. Although multilateral trading rules have existed since 1948 when the GATT was created, an equivalent set of multilateral rules governing investment has not been achieved. As stated above, there are three main reasons for negotiating a multilateral agreement on investment: to harness the benefits of globalization; to manage the pressures of globalization; and to reduce the complexity and extend the coverage of the international investment regime.

Implicit in the negotiation of an MAI is that there are benefits both to international investment inflows and to outflows. For the host country, investment inflows may mean more jobs, greater economic output, enhanced productivity, higher wages, and greater economic activity in supporting industries. For home country firms, investment outflows provide the means to get close to foreign export markets, especially where this involves the sale of services which require a local commercial presence. Outflows also permit the parent company to rationalize international production phases in an efficient manner.

Much of the MAI seems aimed at harnessing the benefits of investment outflows. Rules on national treatment, MFN treatment, performance requirements, general treatment, expropriation and compensation, etc. limit the ability of host countries to discriminate against foreign investment. Such considerations are becoming increasingly important to Canada as the stock of Canadian FDI outside the country now rivals the stock of foreign FDI inside the country.

The MAI places much less emphasis, however, on the pressures and costs associated with foreign investment flows. Increased competition to attract foreign investment has led in some cases to bidding contests between countries, states, or provinces offering incentives to attract FDI. Although such incentives benefit recipient firms, they distort international capital flows and can be costly for host countries. In the area of investment incentives, the MAI draft article merely requires non-discriminatory application (i.e. national treatment, MFN treatment) and consultation where a Contracting Party considered that its investors had been adversely affected by an incentive. The Article does state that further negotiations would be held within three years "in order to further avoid and minimize distorting effects and to avoid undue competition between Contracting parties in order to attract or retain investments."(67) A stronger MAI provision limiting the application of investment incentives would have increased the benefits of investment to the host countries and would have minimized economic distortions associated with incentives.

Other potential pressures associated with globalization, such as competition problems and international bribery, are not dealt with in the MAI. However, the OECD has been carrying out work in these areas. Both the OECD Committee on Competition Law and Policy and the WTO Working Group on the Relationship between Trade and Competition Policy are examining competition policy.

With respect to international business bribes, the OECD Council decided in May 1997 to open negotiations on a convention aimed at criminalizing the practice of bribery of foreign officials. The goal is to complete negotiations by the end of 1997 with a view to the convention's coming into force as soon as possible in 1998. The OECD Council has also urged the prompt implementation of the 1996 Recommendation on the tax deductibility of international business bribes.

It has been alleged that the pressures of globalization will lead to a "race to the bottom" in international standards. In the case of environmental standards, however, there is little evidence that firms migrate to pollution havens. Therefore, it is hard to see why governments would have to lower environmental standards in order to attract FDI.

Concerns that environmental laws would run afoul of the MAI cannot be substantiated. In the United States, the federal government has lodged reservations that cover off almost all state and local laws. It is still unclear whether the Canadian government will lodge similar broad reservations for laws enacted by provincial and local governments. Suggestions that Canadian environmental laws would contravene the MAI are based, in part, on the NAFTA investor-state challenge to Canadian legislation imposing trade restrictions on the fuel additive MMT. However, this legislation is probably not a good test of the compatibility of Canadian environmental laws with the MAI. As the former Minister for International Trade acknowledged, these restrictions cannot be justified on health or environmental grounds. Furthermore, MMT does not meet the definition of a toxic substance under Canada’s own environmental law.

Another potential pressure associated with globalization is the effect on employment and wages in the industrialized countries. A number of studies,(68) including those of the OECD, have found evidence that increased imports from emerging economies have lowered the relative wages and decreased the employment of unskilled workers. There is still considerable divergence of views on the effect of foreign investment on employment and wages and more work needs to be done to understand this relationship.(69) In any case, few believe that imposing trade or investment restrictions is the proper policy response to globalization. Most analysts stress the need for positive employment policies, such as retraining, migration grants, and various forms of wage subsidies, which can help workers to move into new jobs.(70)

The MAI will reduce the complexity associated with the patchwork quilt of bilateral and plurilateral investment agreements. As noted earlier, investment issues are dealt with in a plethora of international instruments including an estimated 900 bilateral investment treaties, OECD Codes of Liberalization and the Declaration, WTO Agreements, and regional trade agreements, such as the NAFTA and the EU treaty. These competing and conflicting rules can create uncertainty for MNEs in the treatment of FDI. A single overarching investment treaty would not only reduce the complexity of the investment environment but would also extend the coverage and provide a stronger mechanism for investment liberalization.

Some of the controversy over the MAI’s application to performance requirements, cultural industries, social programs (including health care), and subnational levels of government is due to the Agreement’s unfinished nature. The cultural exception is still under negotiation and many people seem unaware of the reservations the Canadian government has lodged with respect to particular MAI provisions. These reservations follow very closely those lodged by Canada under NAFTA and which are listed in Annex I and Annex II of that agreement. Under NAFTA, Canada retained the right for Investment Canada to continue reviewing foreign investments and to set certain performance requirements in connection with such reviews; Canada’s social programs were exempted; and provincial laws and regulations that would otherwise have contravened the Agreement were permitted to continue. In many respects, the MAI multilateralizes the NAFTA investment chapter. The MAI’s proposed obligations are very similar to those in NAFTA as are the exceptions and reservations that Canada intends to lodge with respect to these obligations.

(1) Government of Canada, Department of Finance, The Uruguay Round of the General Agreement on Tariffs and Trade, An Assessment of the Economic Impact on Canada, August 1994, p. 17.

(2) Richard G. Harris, Globalization: A Critical Survey, Report prepared for the Standing Senate Committee on Foreign Affairs, September 1994, p. 21

(3) The increase in the ratio would be much higher except that non-tradable services have increased more rapidly over the period than tradable goods. (IMF, World Economic Outlook, May 1997, Washington D.C., 46.)

(4) Ibid., p. 60.

(5) UNCTAD, World Investment Report 1996, Investment, Trade and International Policy Arrangements, United Nations, New York, p. xiv.

(6) Ibid., p. 4.

(7) Ibid.

(8) Ibid., p. 5, 9.

(9) See: Daniel Schwanen, "Investment and the Global Economy: Key Issues in Rulemaking," in Investment Rules for the Global Economy: Enhancing Access to Markets, Pierre Sauvé and Daniel Schwanen eds., C.D. Howe Institute, Toronto, 1996.

(10) See for example, Christopher C. Beckman, Foreign Investment in Canada II – The Foreign Investment Review Agency: Images and Realities, Study No. 84, The Conference Board of Canada, November 1984.

(11) See for example, Keith Head and John Ries, "Rivalry for Japanese Investment in North America," in Richard G. Harris, ed., The Asia Pacific Region in the Global Economy: A Canadian Perspective, University of Calgary Press, Calgary, Canada, 1996.

(12) "Canada Losing Foreign Investment Battle," Foreign Investment in Canada News, Report Bulletin, IC130, November 1996, p. 4.

(13) Ibid.

(14) Ibid.

(15) One study found that between 1981 and 1984 Canadian affiliates operating in the United States purchased from their parent groups in Canada approximately five times the levels of sales that the affiliates sold to their parent groups, averaging a US$4 billion deficit from the U.S. perspective. (Alan Rugman, Multinationals and Canada-United States Trade, University of South Carolina Press, 1990, p. 68.)

(16) WTO Secretariat, The Link between Trade and Foreign Direct Investment, October 1996.

(17) Renato Ruggiero, Director General, World Trade Organization, "Foreign Direct Investment and the Multilateral Trading System," in Transnational Corporations, Vol. 5, No. 1 April 1996, p. 1.

(18) Schwanen (1996), p. 4.

(19) For example, government incentives provided to GM to locate the Saturn auto plant in Tennessee in 1985 amounted to about US$27,000 per employee. Eight years later, in 1993, Mercedes Benz received incentives valued at US$167,000 per employee to locate an auto facility in Alabama. (UNCTAD, World Investment Report 1995, Transnational Corporations and Competitiveness, United Nations, New York, p.296-297.)

(20) For example, see the testimony of officials from NOVA Corporation before the Standing Senate Committee on Foreign Affairs, Issue No. 20, 6 February 1997.

(21) OECD Working Party on Employment, Chapter 6: Trade Earning and Employment: Assessing the Impact of Trade with Emerging Economies on OECD Labour Markets, 3 March 1997. p. 5.

(22) OECD, The Effects of Trade and Foreign Direct Investment on Employment and Relative Wages, Vol. III, No. 32, OECD Working Papers, Paris 1995. P. 26.

(23) Alister Smith, "The Development of a Multilateral Agreement on Investment at the OECD: a Preview," in Towards Multilateral Investment Rules, OECD Documents, 1996. P. 31.

(24) Ibid.

(25) Throughout this paper the MAI draft referred to is the one dated 14 May 1997 (DAFFE/MAI(97)REV2).

(26) Robert Ley, "The Scope of the MAI," Symposium on the MAI, 3-4 April 1997, Seoul, Korea.

(27) See later discussion of the "Issues Arising from the MAI."

(28) Canada, Mexico, and the United States maintained a reservation on the coverage of the article concerning membership on boards of directors.

(29) Canada has reserved its position on item (g).

(30) Canada has reserved its position on items (k) and (l).

(31) Canada has also proposed that paragraph 1(a) also be excepted in the case of investment incentives. This would appear necessary to cover, inter alia, agricultural export support and trade-marketing support programs.

(32) Canada proposes the inclusion of paragraph 1(a).

(33) Proposed section is bracketed.

(34) Proposed section is bracketed.

(35) There are several suggested alternative amendments providing for special share arrangements.

(36) MAI draft, p. 46.

(37) There is debate over whether the word will be "should" or "shall."

(38) The MAI would not mean the end to investment restrictions in Canada’s financial services sector. Access to Canada’s financial services will be determined in the GATS financial services negotiations. Canada has lodged MAI reservations in the financial services sector with respect to the obligations of national treatment and most favoured nation treatment. These reservations would permit Canada to maintain (1) restrictions on the nationality of members of the boards of directors of Canadian financial institutions; and (2) the requirement for Ministerial approval to open more than one bank branch. Canada will also reserve: (1) the right to adopt or maintain any measure relating to the establishment of direct foreign branches in Canada, and (2) the right not to allow the entry of foreign financial institutions in its market unless it is satisfied that treatment as favourable is provided in the foreign institution’s jurisdiction.

(39) Section (d) is blank with a footnote stating that subsequent paragraphs would be necessary only if there were unfinished business at the conclusion of the negotiations that should be completed by the Preparatory Group.

(40) See for example, Tony Clarke, MAI-DAY!, The Corporate Rule Treaty, April 1997.

(41) MAI draft, p.167.

(42) Alan P. Larson, Assistant Secretary of State for Economic and Business Affairs, "The Move Toward Global Rules on Investment," Economic Perspectives, Vol. 2, April 1997, p. 7.

(43) Wendy Cutler, Assistant U.S. Trade Representative for Investment, Services, and Intellectual Property, "Trade-Related Investment Measures and Economic Development," Interview in Economic Perspectives, Vol. 2, April 1997, p. 12.

(44) Department of Foreign Affairs and International Trade (Website), Multilateral Agreement on Investment (MAI), 29 May 1997, p. 3.

(45) See: "Next Election, Your Vote May Be Irrelevant…The new Multilateral Agreement on Investment Gives the Corporations So Much Power, Parliament Won’t Matter." Release by the Council of Canadians.

(46) According to an estimate in the late 1980s about 75% of health care expenditures were made by the public sector. About one-quarter of the remaining 25% did not comprise services but goods, such as drugs and appliances, supplied outside hospitals. (Carolyn Tuohy, "Implications of the Canada-U.S. Free Trade Agreement for the Health Services Sector in Canada," in Marc Gold, and David Leyton-Brown, eds., Trade-Offs On Free Trade, Carswell, Toronto, 1988.)

(47) This deadline was subsequently lifted.

(48) See the discussion in Section E of this part.

(49) MAI Draft.

(50) There is debate over whether the word will be "should" or "shall."

(51) Western Governors Association, Multilateral Agreement on Investment: Potential Effects on State and Local Government, Denver, Colorado, 1997, p. 14-18.

(52) Tony Clarke, MAI-DAY!, The Corporate Rule Treaty, April 1997, p.11.

(53) See the testimony of Mr. H.A. Clark, Assistant Deputy Minister, Environment Canada, before the Standing Senate Committee on Energy, the Environment and Natural Resources, 4 February 1997, p. 28-29.

(54) The Honourable Arthur Eggleton, Minister for International Trade, Letter to the Honourable Sergio Marchi, Minister of the Environment, 23 February 1996.

The Minister for International Trade also pointed out that the proposed import prohibition was inconsistent with Canada’s trade obligations because the legislation would not also prohibit the domestic production, sale or use of MMT. The Minister further noted that "Ethyl Corp. may try to mount an argument that such a ban would be a measure tantamount to expropriation of Ethyl’s investment in Canada. Thus, Canada may also be susceptible to an investor-state challenge under Chapter 11 of the NAFTA."

(55) The Preamble Centre for Public Policy, The Multilateral Agreement on Investment: A "Bill of Rights" for International Investors?, June 1997, p. 2.

(56) See, for example, the evidence given by NOVA Corporation to the Standing Senate Committee on Foreign Affairs. (6 February 1997, Issue No. 20, p. 82) Company officials told the Committee that NOVA’s foreign affiliates follow either host country or Canadian standards (environmental, safety, health, and risk management) whichever country’s are higher.

(57) Judith M. Low, "Trade and the Environment: A Survey of the Literature," in Patrick Low, ed., International Trade and the Environment, World Bank Discussion Papers, Washington D.C., 1992, p. 27.

(58) Office of the United States Trade Representative, Review of U.S.-Mexico Environmental Issues, Washington. D.C., 25 February 1992.

(59) NAFTA Environmental Review Committee, North American Free Trade Agreement: Canadian Environmental Review, Government of Canada, Ottawa, October 1992, p. 62.

(60) Ibid., p. 63.

(61) Department of Foreign Affairs and International Trade (Website), Multilateral Agreement on Investment (MAI), 29 May 1997, p. 3.

(62) MAI Draft, Subnational Measures (draft article), p. 169.

(63) Canadian Statement on the Helms-Burton Act to the Negotiating Group of the MAI, 14 and 15 March 1996, p. 3.

(64) Ibid., p. 5.

(65) "Canada Proposes OECD Disciplines on Extraterritorial Measures, Inside U.S. Trade, Vol. 14, No. 27, 5 July 1997, p. 8.

(66) MAI draft, p. 165-6.

(67) Ibid., p. 46.

(68) For an overview of these studies see: Richard G. Harris, Globalization: A Critical Survey, (1994).

(69) OECD, The Effects of Trade and Foreign Direct Investment on Employment and Relative Wages, Vol. III, No. 32, OECD Working Papers, Paris, 1995, p. 25.

(70) Ibid., p. 26.