What Is the Current International Regulatory Regime for Multinational Enterprises (MNEs)?

Since WWII, the MNEs have mushroomed at an incredible speed, but the international law has yet to catch up. At present, the international regulatory regime remains fragmented leaving a huge gap between legality and reality. While the MNEs' day to day activities are controlled under domestic laws, their multinational nature necessitates a more coordinated and efficient multilateral approach.

The current international regulatory regime can be summarized under five categories as follows:

1. Informal Regulation

Since the 1980s non-governmental organizations (NGOs) have been exercising tremendous influence over the MNEs' operations, by monitoring them closely, and furiously lobbying with the governments. Some MNEs have been self-regulating in the interest of the society.

2. Soft Regulation

This is a new type of regulation which emerged in the last two decades, which essentially shames corporations into voluntarily accepting certain constraints in response to critics, best practice guidelines and Less Developed Countries' (LDCs) scorn. Much reliance has been placed on the effectiveness of such soft regulation. Although they are called "soft," as Peter Munchinski states, they can be hardened into positive law.

Soft regulation works mostly in the areas of labor / human rights, environmental protection and corporate governance. MNEs do not follow these guidelines out of altruistic concern, but rather to enhance their public image.

3. Bilateral Treaties (BITs)

There is a plethora of BITs that affect MNE activities. These documents are concluded between two states wishing to regulate MNE activities which they impact their nations. However, in reality most of the BITs serve to protect the investors' rights in the host country, by limiting the host countries' power over the foreign owned subsidiaries.

Developed nations use BITs to ensure the favorable treatment of their investors in the host countries. BITs customarily include "national treatment" and "Most-Favored-Nation" clauses to accomplish this goal.

Moreover, most of the BITs oblige the host countries to provide adequate and prompt compensation for expropriated investments, waive their right to impose obligations on the MNEs to employ local labor and use local material, and allow them to transfer funds and profits back to their home countries at a market exchange rate.

Furthermore, most of the BITs contain a binding arbitration clause whereby foreign investors can sue the host government.

One positive aspect of the BITs is that it prevents the MNEs from playing the signatories against each other. However, as Muchlinski points out, this is impossible if the equality of bargaining power lacks in the negotiations.

As Kenneth Vandevelde rightfully pointed out, the BIT movement as a whole may be seen as part of an ongoing process to create a new international law of foreign investment to respond to the demands of the new global economy... While the world has developed a relatively elaborate legal structure for trade [in the GATT and WTO institutions]... it has yet to create a similar structure for international investment.

Despite the large and increasing number of BITs, it is open to question whether BITs have been effective in promoting an efficient, liberalized market for investments worldwide.

4. Regional Treaties

Nations across the globe have been opting for regional integration as a way to gain political power, liberalize trade, and accelerate industrialization.

The most powerful organizations are between industrially developed nations, however LDCs have had a few attempts as well.

4.1. North American Free Trade Agreement (NAFTA)

NAFTA is a free trade agreement between the US, Canada and Mexico, which is modeled on the existing Canada-U.S. Free Trade Agreement (FTA). It offers a balanced and stable regulatory system for the MNEs.

However, NAFTA has many enemies, who blame it for the deregulation of international commerce. It is true that MNEs enjoy unprecedented protection, unrestricted right of movement of capitals, goods and services under NAFTA, at the expense of workers' or farmers' rights.

Chapter 11 of NAFTA provides for binding arbitration as a dispute resolution mechanism between MNEs and member governments. Critics argue that taxpayers are being punished in favor of the corporations and that the nations are unable to regulate in the best interest of public health, safety and welfare. This extraordinary assault on the states' sovereignty has led to new proposed agreements such as the Central American Free Trade Agreement (CAFTA) and agreements with Peru, Panama and Colombia.

While the opponents accuse NAFTA as being socially irresponsible, its champions rightfully argue that corporations' ability to resort to binding arbitration is nothing new, in fact it existed in BITs for a long time. This argument is contrived however, especially when considering the increasing number of lawsuits by MNEs.

For example, the Canadian Cattlemen for Fair Trade sued the U.S. to recover $300 million for suspension of imports of Canadian cattle after the discovery of mad cow disease in Alberta. Although the case never saw the light of day, critics ceased the moment to declare that "[b]y entering into NAFTA, the United States no longer has the right to protect its domestic cattle industry from contamination."

In 1996, Metalclad Corporation sued the Mexican government when the Municipality of Guadalcazar refused it permission to reopen a waste disposal facility. In 2000, the arbitral tribunal awarded the company $16,7 million in compensation on the grounds that local environmental laws prohibiting the toxic-waste-processing plant that the company was building were tantamount to expropriation.

The Canadian government was forced to lift restrictions on manufacturing an ethanol-based gasoline additive that it considered hazardous after an American manufacturer said that the ban hurt its business.

United Parcel Service, the package-delivery company, has filed a complaint contending that the very existence of the publicly financed Canadian postal system represents unfair competition that conflicts with Canada's obligations under NAFTA.

Critics contend that NAFTA violates the nations' sovereign immunity, and treats MNEs "as [..] equal subject of international law, on par with governments." The irony is that corporations cannot sue their own governments, which means that foreign investors are treated more favorably than the national investors of a member state.

NAFTA is an important organization that has helped businesses bloom. Its future is uncertain however, especially since the election of a publicly critical new American president in 2016.

4.2. ANDEAN COMMON MARKET (ANCOM)

ANCOM is a customs union which was created in the Cartagena Agreement signed in 1969 between the South American countries of Bolivia, Colombia, Ecuador, Peru -and Venezuela, until its withdrawal in 2006- with a view to promote a balanced and harmonious development of the Member States through elimination of internal tariffs, adopting a common external tariff, and harmonizing economic and trade policies.

ANCOM was disorganized for the longest time. The members believed that foreign investment weakened local business, so they enacted a Common Code for the Treatment of Foreign Investment (Decision 24) to restrict foreign investment.

ANCOM members continually breached their Agreement, but the enforcement against offenders was impossible since the Agreement lacked a dispute resolution mechanism. The Andean Court of Justice was only created in 1983.

Decision 24 was replaced by "Decision 220" in 1987. ANCOM finally became operational after the establishment of a Free Trade Area in 1993 and Customs Union in February 1995. Today all the goods circulate duty free within the subregion.

ANCOM still needs to overcome obstacles before it can become a major economic power in the world like the European Union or NAFTA.

4.3. EUROPEAN UNION (EU)

EU is a political and economic union of 28 countries with a complex web of laws that regulate MNEs, such as the International Market Law, International and European Food Law, Global Administrative Law, Export/Import Controls (including EU Dual-Use Regulation), Economic Sanctions, Anti-Corruption and Anti-Money Laundering, Data Protection, Investment Barriers, Trade, Competition and Disputes.

The EU states healed their grievances since the two World Wars. The Union has won the Nobel Peace Prize in 2012 for promoting peace and international co-operation. It is known for its economic / political stability and strong commitment to human rights and the due process of law. The Copenhagen Criteria for EU membership mandates commitment to human rights, rule of law and market economy.

5. Multilateral Treaties

5.1. Binding Multilateral Instruments

The first binding multilateral rules appeared in the 1995 with the Uruguay Round of multilateral trade negotiations (MTN) coming into effect. The MTN led to the creation of the WTO and GATT became part of the WTO agreements. Subsequently the Agreement on Trade-Related Investment Measures (TRIMs) was incorporated into the WTO.

5.2. Failed Attempts

5.2.1. UN Code of Conduct on Transnational Corporations

About 40 years ago ITT interfered in Chile's internal politics, and caused the overthrow of President Salvador Allende. The matter became subject to hearings in the Church Committee of the United States Congress. President Allende delivered a speech at the General Assembly of the United Nations in 1972, in which he drew international attention to the "economic power, political influence and corrupting action" of the MNEs. Following the uproar, the United Nations Centre on Transnational Corporations (UNCTC) coordinated the drafting of the UN Code of Conduct on Transnational Corporations with a view to establish a multilateral framework to set out the rights and obligations of the MNEs and host nations. The negotiations faded in 1990.

The failure of the efforts was attributed to the conflicting agendas of the following three interest groups:

• LDCs favored regulation under domestic laws for fear that MNEs would violate their sovereignty. Since they did not invest outward, they ignored investors' rights.

• Socialist countries did not allow any inward FDIs. They refused to allow their MNEs to be controlled under a multilateral code.

• The developed countries already had a system to protect their MNEs. Their only reason to negotiate a multilateral agreement was their desire to prevent LDCs from eroding the standards of customary international law.

5.2.2. The Multilateral Agreement on Investment (MAI)

The developed countries wanted to consolidate the strongest features of the existing BITs and other regional arrangements into one document.

The negotiations continued until 1997 without public notice, until a leaked copy of the draft reached an NGO, who accused it of favoring the interests of the investors "far above those of governments, local communities, citizens, workers and the environment."

MAI was attacked as an attempt "to multiply the power of corporations over governments and eliminate policies that could restrict the movement of factories and money around the world. [NGOs argued the document] places corporate profits above all other values" and "puts democracy at risk."

Critics also argued that Article 2.1 which provides that "A Contracting Party shall not expropriate or nationalize directly or indirectly an investment in its territory of an investor of another Contracting Party or take any measures having equivalent effect" would prevent individual governments from passing any laws preventing MNEs from making profit.

It was argued that "environmental, health, or workers' rights legislation that could threaten profits could be interpreted as "expropriation" and prohibited by the treaty"

Another criticism was that the "[MAI empowers] corporations and investors to sue governments directly for cash compensation, in retaliation for almost any government policy or action that undermines profits." The opponents cited the $251 million in damages lawsuit brought by the U.S.-based Ethyl Corporation's against the Canadian government where the Canadian parliament banned a fuel additive produced by Ethyl for environmental and health reasons, the company sued for damages, claiming that Canada violated its NAFTA commitments.

The draft was abandoned in 1998. The real reason for its failure remains the subject of controversy. One view is that the negotiators had many unresolved issues such as the exclude certain sensitive sectors from the negotiations, for example Canada and France wanted to exclude cultural industries. Another view is that the NGOs have brought down the MAI. "If a negotiator says something to someone over a glass of wine, we'll have it on the Internet within an hour, all over the world," said Maude Barlow, chair of the Council of Canadians, a citizens' interest group. The MNEs have not pushed for another multilateral agreement for fear that NGOs' reactions. They prefer to keep a low profile while benefiting from the patched up coverage of the BITs.

6. CONCLUSION

It is evident that MNEs are likely to continue to mushroom. They have successfully spread their activities and amassed enough power and money to bully any one nation standing alone. As some of their critics have rightfully noted, the unique mission to make profits have turned some of the MNEs into sociopaths. They have avoided taxation, violated labor regulations, polluted the environment, engaged in immoral activities, all with impunity.

The existing national and international bodies are simply not equipped to deal with the expansion of international trade. The obvious solution is to come up with an efficient and coordinated mechanism to control the MNE activities through binding and enforceable multilateral instruments.

The past attempts have attracted the same criticisms as NAFTA (although the offending clauses were unnoticed in BITs). New multilateral instruments need to heed all the stakeholders' concerns. They must balance the interests of the host countries and with those of the MNEs, while listening to NGOs. They must design a dispute resolution mechanism that will be designed and implemented to balance private rights with public goods in a legitimate and constructive manner. Such mechanisms must discourage frivolous lawsuits by MNEs and governments must be able to regulate in the best interest of public health and safety.

Finally, in the day of the internet, concocting agreements behind closed doors is no longer realistic. A wider range of groups would need to be invited to negotiations, and more consideration needs to be paid to how non-negotiators and public would construe these documents.

Multinational corporations have increased in numbers since World War II. These corporations are regulated in the host countries, while they remain controlled by their parent companies from other jurisdictions. The current international regulatory system does not provide adequate oversight over their activities, and this lack of oversight gives corporations ample opportunity to engage in unethical practices both towards inhabitants of the host countries and the environment. These businesses need to be regulated in a more coordinated and efficient manner. This article explores the current international regulatory systems, and discusses what steps can be taken to eliminate the loopholes the corporations have been using to continue their harmful practices with impunity.
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