May 21, 1997
A reader asked me recently to write more about business cases and company strategy and less about policy. I will do that (and have in fact in recent weeks) but the policy issues often have substantial impact on enterprise strategy, and sometimes seem to me unavoidable. As is the case this week.
The debates about world trade harmonization — GATT, NAFTA, etc. — have been complex, contentious, and arcane. And, as I’ve written before, founded on a deeply flawed concept, inevitable perhaps in an economy premised on transactions designed to maximize the exchange of stuff… rather than the enhancement of quality.
There was a time in human history when the two were synonymous, a time still present for developing countries, for those who don’t have a lot of stuff and think they want more. Some of these wants are essential, some based on Baywatch envy…some because they have not yet made the connection between things and the benefits things bring. Not their fault, of course; neither have we to any degree.
So it’s been encouraging for me to write of companies like Interface, ASG, Electrolux and others, creating ways to profitably dematerialize their offerings. But the trends are not all in our favor.
Case in point: the Multilateral Agreement on Investment, being hammered out under the auspices of the OECD, which would extend the GATT/NAFTA/WTO approach to movement of capital. The confidential draft agreement from this very low profile process was recently “obtained” by public interest groups, who suggest it raises substantial concerns about the currently popular “lowest common denominator” approach to trade harmonization.
According to the Preamble Coalition, as Washington think tank, countries that sign the MAI will be required to: open all economic sectors to foreign ownership; treat foreign investors no less favorably than domestic firms; remove “performance requirements” (laws that require investors to behave in a certain way in exchange for market access); remove restrictions on the movement of capital; compensate investors in full when their assets are expropriated, either through seizure or “unreasonable” regulation; allow investors to sue governments for damages before international panels when they believe a country’s laws are in violation of MAI rules; and ensure that states and localities comply with the MAI.
Preamble Coalition summarizes the positions thusly: Proponents of the MAI claim that the agreement will provide needed protections for international investors against discrimination and expropriation, and help businesses, consumers and workers in the long-run by improving the efficiency of the global economy. Opponents argue that the proposed agreement will accelerate an economic and environmental “race to the bottom” as countries feel new pressure to compete for increasingly mobile investment capital by lowering wages and environmental safeguards. Opponents also claim that the MAI will allow investors to challenge legitimate regulatory safeguards that enjoy widespread public support but are viewed by investors as impediments to the free flow of capital.
Many people dismissed the anti-NAFTA lobbying lead by the strange bedfellows of Ralph Nader and Pat Buchanan (and oh yeah that Texan…) as crackpot fear-mongering. (And as a recent visit to Monterrey confirmed, there are certainly boom times in Mexico, at least in part due to NAFTA.) But consider some of the legal cases that have emerged in these first few years of NAFTA and the WTO:
- US-based Ethyl Corporation sues Canada–yes, the government–for $350 million (Canadian) for banning import MMT (a fuel additive banned in the US) claiming that the ban is “tantamount to expropriation,” threatening to reduce the value of Ethyl’s MMT manufacturing plant, hurt its future sales and harm its corporate reputation–and have a “chilling effect” by encouraging other countries to review their use of MMT.
- The United States sues, and the WTO overturns, the European Union ban on importing hormone-treated beef.
- Venezuela and Brazil challenge aspects of the US Clean Air Act before WTO, and the regulation is changed.
- The EU rule banning import of fur from leg hold traps is delayed in response to a threatened US/Canada challenge.
- The US House of Representatives votes to gut US Dophin protection to avoid a WTO challenge.
Can it get more aburd? Consider this: Massachusetts recently barred state agencies from doing business with the Myanmar (Burma), adapting its anti-apartheid law by replacing references to South Africa. Thailand, the EU and Japan are threatening to challenge the law before the WTO as a “trade sanction.” “If the WTO had existed during apartheid,” muses Public Citizen’s Lori Wallach, “Nelson Mandela might still be in prison.”
Now we can contemplate the MAI, which may threaten local purchasing preferences, recycled content procurement policies, small business set-asides, community reinvestment laws, currency and stock trading “speed bumps,” investment restrictions based on human rights and envirnmental performance, and more.
Note that this is not a business vs activist issue–auto manufacturers support the ban on MMT, for example–but has the effect of being a trade vs sovereignty-and-any-other-competing-value issue. The WTO panel “made clear,” Wallach and Alan Tonelson wrote recently in the Washington Post, “that…trade effects trump all other considerations.”
It’s an ironic state of affairs, as leading companies are blasting beyond compliance, working to raise regulatory standards, even eschewing their own trade associations as too timid and limiting in their inevitably lowest common denominator focus.
How then do we live with the disconnect?
The business challenge that parallels the policy challenge, of course, is to invent new vehicles for success that emphasize harmonizing economics, biology and physics rather than not trade policies. Business can no more sacrifice short-term profit for long term profit, any more than it should sacrifice long term profit for short term. Leadership belongs to those who can achieve both.
It’s no small task. Merely essential.