(Tentative Translation)

Keidanren's Views on MAI Negotiations

June 17, 1997
Keidanren (Japan Federation of Economic Organizations)

Introduction

Implications of the MAI

The Multilateral Agreement on Investment (MAI), which is under negotiation in the Organization for Economic Cooperation and Development (OECD), is the first comprehensive and binding multilateral framework on investment liberalization and protection. It is expected to contribute to the sound development of the global economy by facilitating international flows of investment. For Japan, the MAI will promote a better environment for outward investment by globalizing enterprises, as well as bring about structural reform in the economy and industry by attracting more investment from foreign countries.

Recognizing the importance of the MAI, Keidanren issued a policy statement entitled "The Environment for International Investment and Japan - Views on the MAI Negotiations" in April of 1996 for the purpose of reflecting the opinions of the Japanese business community in the MAI negotiations. Following the developments in the negotiations in the OECD during the last year, we have revised the statement with our estimation of the results to date and our requests relating to future negotiations.

Expectation for Early Conclusion of the Negotiations

It is unfortunate that the MAI negotiations could not be concluded by the initial deadline, and thus were extended for one more year. Keidanren understands, however, that the delay is not due to declining support of the MAI by member countries but rather is indicative of their desire to make a better agreement. The Japanese business community anticipates an early conclusion of the MAI negotiations and strongly requests that the mandate to set the deadline for next year's Ministerial Meeting be honored.

Estimation of Results to Date and Requests for Future Negotiations

The main purpose of the MAI is to facilitate international investment flows by eliminating investment-distorting effects of national systems through construction of international rules on investment protection, liberalization and dispute settlement. The Japanese business community considers it especially important that the final MAI protects a wide range of investment categories; that it extensively liberalizes existing investment restrictions; and that its rules should be clear enough to avoid arbitrary interpretation and application by national authorities. Furthermore, the Japanese business community hopes that as many non-OECD countries as possible will be able to participate in the agreement.

General Estimation

To this point in time, Keidanren has been satisfied with the MAI negotiations for the following reasons.
First, the MAI is expected to promote investment liberalization. It will first establish the principles of National Treatment, Most Favored Nation (MFN) treatment, and Transparency in foreign investment. Then, it will gradually abolish reservations by Contracting Parties towards these principles through liberalization negotiations and other means.
Second, the MAI will enhance the obligation of investment protection. Keidanren acknowledges that clear-cut provisions have been settled which guarantee general protection of investment, payment of prompt, adequate, and effective compensation in case of expropriation, and free, prompt transfers of profit, dividends, etc. in a freely convertible currency.
Third, effective dispute settlement mechanisms are being constructed within the framework of the MAI. It is important that investor-state dispute settlement procedures have been introduced in addition to the state-state procedures.
On the other hand, Keidanren finds it unfortunate that most of the substance regarding taxation measures is being carved out of the MAI in spite of their heavy impact on investment. The obligations of Contracting Parties under the MAI should not be hindered by taxation measures of national governments. At the very least, the obligation of National Treatment should apply to taxation measures.

Opinions on Individual Clauses

Individual clauses regarding the scope of the MAI, treatment of investment, and investment protection have largely been settled. However, a number of issues remain open for future negotiations. Keidanren's views on the issues of particular importance are as follows:
1. Definition of Investment
   Keidanren acknowledges that a wide range of investment including portfolio investment has been incorporated into the definition of investment covered by the MAI.
   However, it is Keidanren's opinion that Intellectual Property Rights (IPR) and indirect investment (e.g. investment through a subsidiary in a non-Contracting Party, etc.), in light of their importance to business activities, should also be included in the definition of investment under the MAI.

2. Temporary Entry, Stay and Work of Investors and Key Personnel
   Facilitating entry, stay and work of Investors and Key Personnel in host countries is very important. An anti-abuse clause should be added to the provision which makes the MAI subject to national immigration and labor laws. Otherwise, the clause regarding Key Personnel may be rendered ineffective.
   Though there are arguments that prior employment for a period no less than one year should be required for the admission of temporary entry, stay and work of Key Personnel, such a requirement might impede the smooth management and operation of investment, and therefore should not be included in the final agreement.
   Keidanren also finds it unfortunate that outside of the positions of Executive, Manager and Specialist, the definition of Key Personnel does not include Management Trainees and Technicians.
   On the other hand, Keidanren appreciates that the MAI prohibits Contracting Parties from denying entry and stay for reasons relating to labor market or other economic needs tests or numerical restrictions.

3. Nationality Requirements on Senior Management (and Board of Directors)
   Keidanren supports the prohibition of requirements regarding particular nationalities of Senior Management. Furthermore, 'Senior Management' should include as wide a range of management as possible in consideration of the needs of investors. Likewise, nationality requirements regarding Boards of Directors should also be abolished.

4. Performance Requirements
   Keidanren acknowledges that discussion is ongoing towards an explicit prohibition against performance requirements such as export requirements, local content requirements, domestic product and service requirements, trade balancing requirements, restrictions on internal sales, technology transfer requirements, headquarters requirements, and restrictions on supply, which are regulated by the TRIM Agreement and NAFTA as well.
   Production, investment, sales, employment and R&D requirements, native employment requirements, joint venture requirements and local equity requirements, prohibition of which is under discussion, have a great investment-distorting effect, and therefore should be abolished as well.
   Also, as is seen in the TRIM Agreement, performance requirements in exchange for favorable treatments should be prohibited as widely as possible.

5. Privatization
   In the case of privatization of a state enterprise, foreign investors should be guaranteed effective market access, and given National Treatment and MFN treatment. Though there are arguments for special share holding arrangements such as golden shares and management/employee buyouts, these provisions might lead to discrimination against foreign investors and therefore should be abolished.
   If Contracting Parties should be allowed to add reservations concerning privatization in the future, these reservations should be limited to the areas registered in advance of finalization of the MAI.

6. Investment Incentives
   While some insist that investment incentives should be regulated, the application of the general principles of National Treatment and MFN treatment provides sufficient regulation in these matters. As investment incentives are indispensable policy tools for economic development, particularly for many non-OECD countries, too many restrictions might prevent some countries from participating in the MAI.

7. Corporate Practices
   Keidanren finds it an appropriate conclusion that activities of private enterprises are not covered by the MAI.

8. General Exceptions
   Among the general exceptions, measures for 'security interests' and for 'the maintenance of international peace and security' should be clearly and narrowly defined.
   Exceptions for 'public order' and 'preservation of culture' should not be permitted in principle, for their definitions are too ambiguous. If these exceptions should be permitted, they should be strictly limited to avoid arbitrary application.
   Furthermore, there should be an anti-abuse clause against invoking general exceptions as a means to evade the obligations under the MAI.

9. Reservations
   Standstill should apply to all reservations in principle. Exception to this principle should be strictly limited to future privatization, etc..

Opinions on Other Important Issues

Other than the above-mentioned points, there are a few political issues in the MAI negotiations that merit discussion.
1. Treatment of Regional Economic Integration Organizations (REIO)
   Exceptions to the application of the MAI concerning REIO threaten to provide for discriminatory treatment of investors outside REIO, and therefore should not be permitted.

2. Application to State Governments
   As a matter of course, sub-national levels of government (e.g. state governments) should be fully binded by the MAI as well. As for those measures which were introduced before finalization of the MAI and which are not in conformity with the agreement, reservations should be lodged on individual measures and as concretely as possible.

3. Prevention of Extra-territorial Application
   There should be a provision which prevents the extra-territorial application of national laws of one Contracting Party (e.g. Helms-Burton Act) from impeding foreign investment by investors of other Contracting Parties.

4. Liberalization Negotiations
   Keidanren has strong expectations for the development in liberalization negotiations, and hopes that reservations by individual countries will be strictly limited and transparent through future negotiations.

5. Issues on Labor Standards and the Environment
   Naturally, the principles of National Treatment and MFN treatment should apply to policy measures of Contracting Parties regarding labor standards and the environment.
   Furthermore, Keidanren considers it appropriate that a provision has been created to prevent host countries from unduly relaxing labor standards or lowering environmental standards in order to encourage investment.
   However, introduction of additional regulations which restrain policies of host countries regarding labor standards and the environment should be carefully reviewed, for they might provoke antipathy against the MAI amongst non-OECD members.

Conclusion

While the MAI is now being negotiated among the OECD members, it is important that a number of non-OECD members including Asian countries will participate in the agreement in the future. For this reason the OECD needs to continue its efforts on enhancing the understanding and interests of non-members by holding seminars and conferences with concerned parties. Keidanren will also recommend non-member countries to join the MAI through extensive dialogue and discussion with these parties. At the same time, as the MAI is an agreement of high standards, certain interim measures and other flexible considerations should be offered to allow the participation of non-OECD members. On the other hand, Keidanren expects that for the countries which cannot join the MAI, investment liberalization will promoted through the frameworks of bilateral investment treaties and regional arrangements such as APEC.

Furthermore, while the MAI offers an important framework to facilitate international investment, more effort is needed by individual countries to create a better investment environment and to promote inward and outward investment flows. It is important particularly for Japan, in order to enhance the inward flow of foreign investment, to further abolish and relax regulations and to reduce the high cost of doing business there, through, for example, reduction of corporate tax by far the heaviest in the OECD countries.