The Political Economy Of The Multilateral Agreement On Investment
Alan M. Rugman

The Economic Logic of the MAI

While the intellectual foundations of the MAI are to be found in the FTA of ten years ago, the economic and political dynamics of the MAI are also based on the FTA. In terms of inward and outward foreign direct investment (FDI), seventy percent of Canada's is with United States, and this is already governed by the FTA and NAFTA. Therefore the MAI will not bring any changes to investment rules for the great majority of Canada's FDI. Thus, the MAI cannot create any major new pressures on jobs, health or culture. As for the environment, the NAFTA, of course, was the first international trade and investment agreement to explicitly consider environment, both in its text and through a new side agreement. There now exists a NAFTA-based Commission on Environmental Cooperation, based in Montreal, which is beginning to research, assess and help improve cooperation on environmental issues in Mexico as well as in Canada and the United States. While in the draft MAI there are no environmental provisions, Canada retains the benefits of NAFTA's environmental measure for over 70 percent of its trade and investment linkages.

The long-term underlying logic of the FTA, NAFTA and MAI (from a Canadian perspective) is, of course, driven by the extraordinary high level of integration of the Canadian and U.S. economic systems. As is well known, for the last 20 years over two thirds of Canada's trade has been with the United States. Indeed, Canadian exports to the United States have increased from 64% in 1981 to 73% in 1987 (at the time of the FTA) to 82% by 1996.

Perhaps less well known is that while Canada's inward FDI follows a similar course (in 1996, 68% of the stock of all inward FDI was from the United States.) Canada's outward FDI is now much more diversified. In 1996, only 54% of all Canadian outward FDI stock was in the United States. There was as much as 66% of Canada's outward FDI stock in the United States in 1987, but in the last few years it has diversified to the E.U. (now 20%) and Asia (although there is still only 1.6% in Japan). While these data still confirm the tremendous economic interdependence of Canada and the United States, they explain why the MAI will be of benefit to Canadian business as it continues to diversify to Europe and Asia.

The MAI is not a bad news but a good news story. The other side of the national treatment coin is that Canadian outward FDI will be encouraged by an MAI. Indeed, as a non-member of the triad (the United States, European Union and Japan,) Canada is a small, open economy dependent on access to triad markets. Today this access is more often achieved through FDI than through trade (although FDI and trade are highly positively correlated). While 54% of Canada FDI stock is in the United States (and thereby already has national treatment) the MAI will be very useful in setting stable rules for the rapidly increasing stock of Canadian FDI in non-U.S. areas, especially in the E.U. and Asia. The MAI, in this sense, should help Canada to continue to diversify its outward FDI away from the United States. Of particular relevance in the MAI will be investment rules to ensure Canadian business has stable access to the E.U. in resource-based sectors such as forestry products, (where there has been a wave of protectionism in the last four years). The MAI should also help to open up the Japanese, other Asian and Latin American markets for Canadian FDI.

While the MAI can help reduce Canada' economic dependence on the United States, it is important to keep in mind the "regional" nature of business in North America. Table 1 reports the bilateral stocks of FDI between Canada and the United States over the last twenty years. The most striking point is that over this period there has been a dramatic increase in the relative amount of Canadian outward FDI to the United States compared to U.S. FDI in Canada. The last column of Table 1 shows that in 1976 the ratio of outward Canadian FDI in the United States to inward U.S. FDI in Canada was only 20%, i.e. there was five times as much U.S. FDI in Canada as Canadian in the United States. Even in 1976 this was good news, since Canada was only one tenth the size of the U.S. economy, so we had twice as much FDI in the United States as would have been expected on the basis of relative size. By 1985 the ratio of bilateral Canadian outward FDI to inward FDI had tripled to 62% and at the time of the FTA in 1987 was 66%. In the ten years since the FTA the ratio has continued to increase and now stands at 76%.

Table 1: FDI Between Canada and the United States 1980-1996

A	B	C	D
Year	Canadian FDI in the U.S. (Cdn. $m)	U.S. FDI in Canada (Cdn. $m)	(B) (C) %
1976	6,547	32,726	20.0
1977	7,651	35,595	21.5
1978	9,615	39,352	24.4
1979	12,976	44,006	29.5
1980	17,849	50,368	35.4
1981	23,695	53,777	44.1
1982	25,189	54,457	46.3
1983	30,262	59,706	50.7
1984	36,683	64,762	56.6
1985	41,851	67,874	61.7
1986	44,461	69,241	64.2
1987	48,876	74,022	66.0
1988	51,025	76,049	67.1
1989	56,578	80,427	70.3
1990	60,049	84,089	71.4
1991	63,379	86,396	73.4
1992	64,502	88,161	73.2
1993	67,770	90,477	74.9
1994	76,781	102,035	75.2
1995	86,466	112,485	76.9
1996	92,907	122,722	75.7
Average rate of increase	14.6	6.9

 

Source: Statistics Canada, Canada's International Investment Position, Catalogue 67-202, 1926-1996.

Behind these figures lies the untold story of the success of the FTA. Canadian-based MNEs are doing well in the U.S. market and they have developed as viable parts of business networks and economic clusters on a North American regional basis. Today there is no such thing as a Canadian business - they are all North American businesses. Although Canada remains one tenth the size of the U.S. economy, Canada has access to the U.S. market via FDI, to the extent that the ratio of bilateral outward to inward FDI is 76%, i.e. at least seven times larger than is expected by relative size alone. The MAI will provide stable rules to help Canadian business experience the same sort of market access in Europe and Asia.

The Canadian-owned MNEs that are doing well in the highly competitive global U.S. market include Nortel, Alcan, Noranda, Moore, International Thompson, Bombardier, Bank of Montreal, etc. In addition, the U.S. MNEs in Canada, such as G.M., Ford, Chrysler, IBM, DuPont, etc. contribute to Canada's economy, by providing jobs and paying taxes. Together the 50 largest Canadian-owned MNEs in the United States and U.S.-owned MNEs in Canada account for 90% of all two way FDI and well over 70% of all bilateral trade. The three U.S.-owned auto assemblers themselves lead a cluster that accounts for one third of all U.S.-Canadian trade. These points were known during the FTA negotiations in 1985-1987, and the story of North America economic integration is reflected in the FTA and NAFTA, and now in the MAI.

One of the exemptions in the MAI is for national security. This is a loophole put in by the United States to subsidize high tech consortia and continue current discriminatory practices against the U.S. subsidiaries of foreign MNEs. This is a type of "conditional" national treatment affecting R and D which the NAFTA also permits. It remains one of the areas where misguided advocates of national competitiveness and strategic trade policy pin their hopes for an industrial/science policy.

It is to prevent such discriminatory measures by triad members that the MAI is designed and it is in the economic interests of smaller countries like Canada to criticize the conditional national treatment by others and to refrain from using it themselves. The latter is a simple choice since a national industrial/science policy for Canada is doomed to economic failure as it protects small market Canadian-based businesses and discourages more useful inward FDI. But the major point to keep in mind is that the MAI is highly unlikely to change current NAFTA-based practice permitting R and D subsidies and conditional national treatment. Thus Canada is not much affected by the MAI in the area of science and technology.