Multinational Corporations and State Dispute Settlement - Essay Example

Multinational Corporations Grade (May 9, Multinational Corporations Question 1. DO EITHER OF THE LETTERS HAVE THE BETTER ARGUMENT AND WHY? The issue of including State Dispute Settlement (ISDS) provisions in international trade agreements has become controversial, with varied opinions on the merit and shortcomings associated with these provisions for the member states. Nevertheless, based on the arguments presented in both letters to high United States officials, the response letter presents a better argument than the original letter sent to the officials. This is because, while the letter sent to the high United States officials through the Alliance for Justice is largely based on isolated and perceived shortcomings of the State Dispute Settlement (ISDS), the Response Letter has presented a more balanced outlook of this dispute resolution mechanism, not only through delving into the issue deeply, but also through presenting factual evidence. One of the argument as presented by the original letter sent to the high United States officials through the Alliance for Justice is that the State Dispute Settlement (ISDS) allows corporations to initiate proceedings against a government for actions allegedly causing loss of profits for the corporation. However, this assertion is highly inaccurate, as presented both in the European Commission definition of State Dispute Settlement (ISDS) and in the Repose Letter. According to the European Commission, for the State Dispute Settlement (ISDS) to be initiated against a government, the investor must present evidential claim that the government has breached a set of agreed rules as set out in the international trade agreement (European Commission, 2013). This fact has also been repeated again in the response Letter, which argues that corporations are not allowed under the State Dispute Settlement (ISDS) to initiate action against governments for actions causing a loss of profit. Instead, the Response Letter has clarified that loss of profit is a mere measure of damages, as opposed to being a sufficient reason for instituting proceedings against a government. In this respect, the Response Letter presents a better argument, since its argument agrees with the European Commission’s definition of the State Dispute Settlement (ISDS). The second aspect that makes the Response Letter have a better argument than the original letter sent to the United States high officials is related to transparency. The Response Letter argues that the State Dispute Settlement (ISDS) enhances transparency as compared to internal courts dispute resolution mechanisms, since the ruling and procedures of the ISDS can be followed openly and freely by the public, as opposed to the court proceedings, where obtaining the court documents may cost individuals $10 per page. The advantage of transparency as one of the major benefits derived from the ISDS has also been echoed by a study that was undertaken to establish the impact of State Dispute Settlement in the Transatlantic Trade and Investment (TTI) Partnership, which concluded that the ISDS increases transparency, through providing an international forum outside the home courts, which enhances lack of impartiality and immunity for any party to the proceedings (Tietje & Baetens, 2014). Thus, the argument by the Response Letter is more superior, since it underlines the relevance of the establishment of the ISDS mechanism from the onset, which was to ensure that it provides an alternative dispute resolution mechanism, where the parties to the case are not in any way capable of influencing the proceedings or the outcome. Further, the Response Letter presents a better argument when compared to the original letter that was sent to high United States officials through the Alliance for Justice, through arguing that the ISDS presents a dispute resolution mechanism where foreign investors can get legal redress against the arbitrary and discriminative host government actions towards the foreign investors. The letter also argues that where the government does not involve in such arbitrary and discriminative practices, the government has a chance of winning the case against the foreign investor. In fact, the Response Letter has supported this argument through another argument. The supporting argument is to the effect that the initiation of the legal proceedings against a host government does not only serve to offer foreign investors an opportunity for redress against a wrong committed by the host government, but also offers the host government an opportunity to vindicate their choice of policies. This argument is supported by a legal advice offered to the Organization for Economic Co-operation and Development (OECD), which held that, ISDS offers a suitable forum for foreign investors to seek redress against the wrongs that might been committed by host governments, through breaching their investment–related obligations (Yannaca-Small, 2006). Therefore, the ISDS mechanism does not serve to undermine the sovereignty of a nation which is party to an international trade agreement. On the contrary, it serves to merely ensure that a country fulfills its obligations as agree under the trade agreement, considering thatover 90% of international trade agreements consisting ISDS provisions have operated without any investor claims (Miller & Hicks, 2015). 2. ARE THERE ALTERNATIVES TO THE FRAMEWORKS DESCRIBED IN THE LETTERS? There are two existing alternatives to the State Dispute Settlement (ISDS) as has been described in the letters. The first alternative is the UNCITRAL Arbitration Rules, which offers for an international trade agreement arbitration mechanism between foreign investors and host governments, whether contractual or not, as long as the parties have agreed to settle the dispute under these rules (UNCITRAL, 2010). Article 7 of Section II of the UNCITRAL Arbitration Rules as an international trade resolution mechanism provides for the parties to a dispute to appoint an arbitrator through mutual agreement, where the arbitrator shall then preside over the resolution of the dispute prevailing between the parties (UNCITRAL, 2010). Additionally, Article 9 (1) of the UNCITRAL Arbitration Rules also provide that the parties to an agreement can appoint three arbitrators, where each party to the dispute appoints one arbitrator each, and then the two arbitrators jointly appoints a third arbitrator, who will act as the presiding arbitrator (UNCITRAL, 2010). The arbitrators so selected can then resolve the dispute existing between the parties within the rules of agreement of both parties. Therefore, the UNCITRAL Arbitration Rules are highly similar to the State Dispute Settlement (ISDS), since they operate on the basis of prior agreement by two states to be bound by the trade or investment agreement. The second alternative to the State Dispute Settlement (ISDS) is the gunboat diplomacy, which is a form of dispute resolution mechanism that involves a state resolving a dispute with another foreign state or foreign party through the use of military power intimidation (Cable, 1971). This mechanism of international investment and trade dispute constitutes actual threats of warfare by the superior force on the perceived inferior party to the trade or investment, as a way of ensuring that the superior power has its way in benefiting from the trade (Cable, 1971). The gunboat diplomacy mechanism of resolving an international trade or investment interest is totally different from both the State Dispute Settlement (ISDS) and the UNCITRAL Arbitration Rules, since it does not necessarily follow the route of a breach by one party of a previously agreed trade or investment treaty. Despite the gunboat diplomacy mechanism being an ancient mechanism of resolving trade and investment interest dispute between countries, it is still present but in a rather diluted form in the 21st century (Landler, 2011). The recent example that has been cited to be akin to the gunboat diplomacy is the competition between the United States and China over international resources (Landler, 2011). The USA and China are competing to tap the rich oil and gas reserves in the tropical offshore, and this scramble by the two fuel-hungry economies has brought about an international resources struggle that echoes the 1800s (Landler, 2011). Question 2: How has ideology shaped the approaches to national and international regulation of multinational enterprises? Explain fully and give examples. The high fraction of investment, trade and business in many countries is being conducted by corporations which are owned and controlled from outside jurisdictions. Such corporations are commonly referred to as multinational corporations, since they do not operate their investments or business in one country, but rather in a number of countries. The multinational enterprises play a major role in the global economy. Their contribution is not only in the area of investment in different jurisdictions, but also in helping grow such economies where they have invested. The ideology surrounding multinational corporations is that they have brought and continue to bring numerous benefits to nations globally, most especially as related to closing of the knowledge-gap between the developed and the less developed countries (Stiglitz, 2007). In addition to bringing in capital investment that eventually results to development in the less developed countries, multinational corporations are useful in the transfer of technology, training of human resources and creating avenues for access to foreign markets (Stiglitz, 2007). Due to these numerous benefits that are associated with the multinational corporations, the ideology therefore has been that they need to be protected and facilitated to continue with their operations in the different jurisdictions. The contribution of the multinational corporation to the global annual domestic product is huge, considering the fact that by the end of 2001, it was estimated that the total GDP contribution for the multinational corporations globally was $3.5 trillion (Avi-Yonah, 2003). Additionally, the sales by the foreign affiliates of different multinational corporations amounted to $19 trillion in 2001, compared to the total global export by non-multinational corporations in the same year, which constituted less than $17.5 trillion in the same year (Avi-Yonah, 2003). Statistics have also indicated that about two-thirds of the world trade is conducted by multinational corporations, while one-third of the world trade is contributed by trade between multinational corporations (Avi-Yonah, 2003). The contributions of the multi-national corporations in filling the knowledge gap is even more notable, owing to the fact that multinational corporations are responsible for about 75% to 80% of the total global research and development (R&D), while at the same time contributing approximately 90% of the global technology transfers (Avi-Yonah, 2003). Such favorable contribution of the multinational corporations to the global economy has resulted in the general ideology that multinational corporations are very important entities in the global economy, and thus they deserve protective regulations in the foreign jurisdictions where they operate. The other ideology surrounding the multinational corporation is that they are foreign-based corporations that scramble for investment and business opportunities with the locally-based firms. In this respect, the ideology becomes that the locally-based firms might be favored by their governments at the expense of the foreign-based corporations, to make the locally-based firms have a competitive advantage over the foreign based firms. Thus, the ideology provides that the foreign-based multinational corporations need to be protected against the partiality and immunity of the national laws that the host governments might apply in favor of the locally-based firms (Avi-Yonah, 2003). Most importantly however, the ideology has been that the multinational corporations only focus on the market, investment and profit enabling opportunities in the foreign jurisdictions where they serve, while leaving the social and environmental concerns arising from their operations to the national governments of the host countries (Levy & Prakash, 2003). The overall ideology therefore becomes that multinational corporations are major targets for discrimination by the host governments, through regulations that lack impartiality and which offers immunity for the locally-based firms. Overall therefore, the ideology surrounding multinational corporations has shaped the approaches to national and international regulation, through making the regulations more oriented to the protection of the multinational enterprises. The general approach by most of the national and international regulations of multinational enterprises is the creation of a protective regulatory framework, which can facilitate and enable the multinational corporations to undertake their international trade and investment operations with little hindrances from the host environments. For example, the General Agreement on Tariffs and Trade (GATT) is an international trade agreement regulation that has purposed to ensure that the multinational corporations operating in foreign countries are not discriminated against by protective or inhibitive national laws (Avi-Yonah, 2003). Such international regulation seeks to ensure that the state members to the agreement provide an equal business and investment environment for both the locally-based and the foreign-based firms. The GATT does not only make provision for rules requiring that the host countries provide a neutral business environment for both the local ad the foreign-based firms. Rather, it also makes provisions that prohibit any member state from enacting laws that can discriminate against the foreign-based firms, by giving the locally-based firms a competitive advantage. Further, GATT also has some category of laws that offer the facilitation of trade and investment between the developed and the less developed countries, by allowing the developed countries to offer preferential treatment to the foreign-based firms from the less developed countries, for example through customs and tariff elimination for such firms (GATT, 1979). Therefore, the major focus of the GATT is not only to protect the multinational enterprises operating in foreign countries, but also to ensure that their operations are facilitated through the creation of favorable national and international trade regulations that might not be even available to the locally-based firms. The GATT requires that the international trading parties will apply measures that facilitate and promote trade, rather than creating measures that create difficulties for firms from the international trading partners from conducting trade in the foreign jurisdictions effectively (GATT, 1979). In this respect, GATT, as one of the international regulations of multinational enterprises, seeks to eliminate all barriers, and allow the multinational enterprises to have a smooth operating ground in the foreign countries where they have their operations. Another example is the Multilateral Agreement on Investment (MAI) that is provided for under the Organization for Economic Cooperation and Development (OECD) (Stiglitz, 2007). This international regulation acts as a trade and investment regulation that requires the member states to the agreement to provide a neutral investment environment for both the locally-based and the foreign-based firms that operate within the host countries (Stiglitz, 2007). This international trade regulation also makes provisions for bilateral agreements as well as provisions for free trade agreements, as a way of encouraging the international trade partners to continue the foreign-based investment into different jurisdictions. The tendency has been to create more protection for the international investors, in order to facilitate and encourage cross-border investment (Stiglitz, 2007). The approach to the multinational enterprises by the national and international regulations has not only been targeted at facilitating the operations of the multinational enterprises in the foreign jurisdictions, but also to lower regulatory standards across jurisdictions (Levy & Prakash, 2003). This has resulted in the multinational enterprises becoming influential not only in the investment, trade and development of some nations, but also on the eco-political environment of their host nations. The influence of the multinational corporations on the internal eco-political environment of the host countries is not always negatively oriented towards benefitting the multinational enterprises (Levy & Prakash, 2003). The multinational corporations sometimes seek to enhance the domestic governance of the host countries, through supporting various governance initiatives. Nevertheless, most of the approaches to multinational corporation regulations have adapted the form of lowering the inter-jurisdictional standards. This is most especially in the area of free labor movement, as a way of allowing the smooth inter-transfer of human resources by their multinational corporations from their different jurisdictions (Levy & Prakash, 2003). References Avi-Yonah, Reuven S. (2003). National Regulation of Multinational Enterprises: An Essay on Comity, Extraterritoriality, and Harmonization. Colum. J. Transnat’l 42(1), 5-34. Cable, J. (1971). Gunboat Diplomacy: Political Applications of Limited Naval Force. Chatto and Windus for the Institute for Strategic Studies. European Commission. (3 October 2013). Factsheet on: Investor-State Dispute Settlement. European Commission. GATT. (28 November 1979). Differential and More Favourable Treatment. Reciprocity and Fuller Participation of Developing Countries’, Ministerial Conference Decision, L/4903, available at http://www.wto.org/english/docs_e/legal_e/enabling1979_e.htm [the ‘Enabling Clause’] Landler, M. (NOV. 12, 2011). A New Era of Gunboat Diplomacy. The New York Times. Available at: http://www.nytimes.com/2011/11/13/sunday-review/a-new-era-of-gunboat-diplomacy.html?_r=0 Levy, D. & Prakash, A. (2003). Bargains Old and New: Multinational Corporations in Global Governance. Business and Politics 5(2), 131-150. Miller, S. & Hicks, G. (January, 2015). Investor-State Dispute Settlement: A reality Check. Center for Strategic and International Studies. Stiglitz, J.E. (2007). Regulating Multinational Corporations: Towards Principles of Cross-Border Legal Frameworks in a Globalized World Balancing Rights with Responsibilities. American University International Law Review 23(3), 451-558. Tietje C. & Baetens, T. (2014). The Impact of Investor-State-Dispute Settlement (ISDS) in the Transatlantic Trade and Investment Partnership. Ministry of Foreign Affairs, The Netherlands. UNCITRAL. (2010). UNCITRAL Arbitration Rule (as revised in 2010) United Nations: United Nations Commission on International Trade Law. Yannaca-Small, K. (2006). Improving the System of Investor-State Dispute Settlement. OECD Working Papers on International Investment, 2006/01, OECD Publishing. Read More