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News Release

Antiglobalists Did Not Kill the Multilateral Agreement on Investment

October 16, 2000

Contact:    Edward M. Graham    (202) 328-9000

Washington, DC—Virtually every major international economic meeting since the WTO ministerial in Seattle last year has been disrupted by antiglobalist protests. In fact, this pattern began more than a year prior to Seattle when activists protested in Paris against the Multilateral Agreement on Investment (MAI) then being negotiated at the Organization for Economic Cooperation and Development (OECD). The MAI negotiations ended in failure and activists claimed credit.

Fighting the Wrong Enemy: Antiglobal Activists and Multinational Enterprises rejects this claimed victory by the antiglobalist movement. According to the author, Institute Senior Fellow Edward M. Graham, the governments that were attempting to negotiate the MAI were deadlocked over a number of contentious issues well before the protesters began to appear. The presence of large-scale demonstrations against the MAI, and the failure of business constituencies to fight for successful completion of the negotiations doubtlessly helped to push governments to end the negotiations without any agreement. But, it was the governments' inability to break the deadlock and to resolve several outstanding substantive issues that doomed the MAI rather than the presence of demonstrators. (The Institute's recent publication The WTO after Seattle edited by Jeffrey J. Schott, likewise argues that the failure in Seattle one year later resulted from the lack of agreement among WTO member governments to enter a new round of multilateral trade negotiations rather than a victory for the demonstrators.)

Antiglobal activists have certainly made their voices heard in Paris, Seattle, and other cities. Their message was uncompromising: global economic integration fostered by expanding international trade and, perhaps even more, by investment activities by multinational enterprises, impoverishes the world's workers, in developed and developing countries alike, and despoils the environment.

Much of Graham's analysis focuses on examining this message and asking whether the antiglobalists are correct. The picture that emerges suggests that, on balance, the activists have it wrong. To be sure, there are cases where foreign direct investment in developing nations involves sweatshops where pay is unacceptably low, working conditions are inhumane, and child-workers are chained to the machines they operate. But such operations are atypical. The evidence strongly suggests that foreign-controlled activities in developing nations normally pay wages far above local levels and create jobs that are desired by local residents. Indeed, in factories like those run by US automotive firms in Mexico, workers are skilled and paid well even by US standards. A plethora of evidence shows that foreign direct investment in developing nations is associated with positive economic growth that benefits large segments of the populations of these countries.

Antiglobalists also argue that foreign direct investment in developing nations adversely affects workers in the more advanced nations where the investing firms are based. Graham argues that the effects of direct investment in poorer nations are felt by workers in richer nations largely via trade. He presents original empirical results (developed in collaboration with Institute Research Assistant Erika Wada) to show that, for the United States, direct investment by US firms in developing nations stimulates US exports and works to the benefit of workers employed in exporting industries. But the direct investment also stimulates US imports and these work against the interest of workers in import-competing industries. Thus the effect of such investment on US workers appears to be mixed, with some workers benefiting but others being adversely affected. The net effect on the United States is nonetheless positive, for the same reasons that open trade policies lead to a positive outcome: consumers gain from the wider choice of products and lower prices associated with open trade. This gain, when combined with gains to workers employed in export-generating sectors, more than offsets losses to workers employed in import-competing sectors. This in turn reinforces a case that has long been made, notably that adjustment assistance to the latter is warranted.

With respect to antiglobalist claims that multinational firms despoil the environment, the evidence is also mixed. The starkest of these claims are clearly wrong. There is no evidence whatsoever that globalization of economic activity is creating a "race to the bottom" whereby nations are forced to lower their environmental standards in order to compete for job-creating investment by multinationals. Indeed, there are instances where foreign direct investment creates a "race to the top", for example, by replacing dirty activities in fast-growing nations with cleaner ones or by transferring pollution abatement technologies to developing nations.

Graham also notes, however, that direct investment contributes to economic growth in developing nations and, because nations that are in the early stages of development do tend to witness environmental degradation as a consequence of growth, there is some connection between direct investment and this degradation. There are also specific sectors that tend to be destructive of the environment, such as logging and mining. The key issue is this: given the need to relieve poverty in much of the world and the potential of globalization in general, and direct investment in particular, to accomplish such poverty relief, how should we balance the need for environmental preservation with the need for poverty reduction? At least some antiglobal activists have enunciated simplistic responses to this issue along the lines that "small is beautiful", which would keep much of the population of developing nations poor and is simply not acceptable to the majority of the world's people who have been born into poverty.

Graham concludes by revisiting the issue of a multilateral agreement on investment that might be lodged in the WTO. He concludes that current politics augur poorly for such an agreement, and that such an agreement is not necessary anyway because foreign direct investment is flourishing without it and seems likely to continue doing so. Graham argues that many of the remaining barriers to direct investment can be removed by deepening existing WTO agreements, especially the General Agreement on Trade in Services (GATS), which is an embryonic investment agreement covering services. Furthermore, this deepening of existing WTO measures should focus on priorities other than those stressed in the MAI. In the GATS, for example, the stress should be on reduction of investment barriers in the services sectors that can create greater impediments to international trade in services than traditional barriers such as tariffs.

Furthermore, a priority should be to address an issue that was almost taboo in the MAI negotiations, notably subsidies to investment that are routinely granted by governments to induce firms to locate particular undertakings on their soil. In the United States, such subsidies are granted by individual states and in most cases do little more than to induce firms to place an investment in one particular state rather than another, at taxpayers' expense. Such subsidies are ultimately wasteful: they do not increase the total amount of economic activity that is created; they merely redistribute it. The redistribution arguably reduces overall efficiency and can even create a need for ongoing subsidization to keep a particular undertaking open. A collective agreement to reduce or end such subsidies, for example, via expansion of the WTO Agreement on Subsidies and Countervailing Measures, would be very useful.