recasting the die : towards strengthening democratic...

INTERNATIONAL POLICY ANALYSIS

ThereisaneedforgreaterdemocraticcontrolofthepowerofTransnationalCor-porations,whicharekeydriversofanewparadigmofinternationaleconomicandsocialpowerrelationsthatcontrol80%ofinternationaltrade.Emphasizingthene-cessityofcombating»corporatecapture,«ithighlightsthreepolicyareaswherethepowerofTNCshasbeenparticularlyevident—investmentregimes,taxationsystems,andlaborinthecontextofhumanrights.

InaddressingthedemocraticdeficitsandthemassivepowerofTNCsinthesethreeareasitisarguedthatthereisaneedforcivilsocietyandgovernmentsnotonlytodevelopspecificresponses ineachareabutalsotomovebeyondthe levelofad-dressing each individually to finding common ground for amore comprehensiveapproach.Forexample,thenascentstatusofstrategiccorporateresearchinregardtocampaignstrategiestobuildunionpowerandforgebroadersocialmovemental-liancesneedsabroaderhorizonthatincludesinvestmentandtaxationandpossiblyotherareasaswell.

Findingeffectiveanswersandbuildingdemocraticinstitutionsofregulationatthelo-calandnationallevelwillbeinadequateifnotdirectedtowardcreatingandstrength-eningsupranationalandcross-borderapproaches.Theglaringdemocraticdeficitsincurrentstructuresofglobalgovernancemustbecounteredwithglobalcooperationtoward enhancing democratic involvement and control of multinational corpora-tions.

Recasting the DieTowardsStrengtheningDemocraticControlofthePowerofTransnationalCorporations

MICHAEL FICHTERDecember2014

1

MICHAEL FICHTER | RECASTING THE DIE

Contents

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

2. Investment Rules and Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52.1 TheInternationalInvestmentRegime. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

2.2 RegulatoryFrameworkoftheIIR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

2.3 DisputeMechanismsandProcedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

2.4 Alternatives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

2.5 RecommendationsandtheWayForward. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

3. Taxes and new business models. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103.1SeparateEnterprise-Arm’sLengthPrinciple(SE-ALP).......................... 11

3.2Alternatives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

3.3RecommendationsandtheWayForward.................................. 13

4. Labor and Employment in the Context of Human Rights. . . . . . . . . . . . . . . . . . . . . 144.1Statements,Codes,Principles,Norms,andRegulatoryInitiatives. . . . . . . . . . . . . . . . 14

4.2Alternatives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

4.3RecommendationsandtheWayForward.................................. 18

5. Conclusion, Questions, and Ideas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

ThepaperisanoutcomeofacollaborationwithseveralexpertswhichbeganataFriedrich

EbertStiftung(FES)workshopheldinSãoPaulo,Brazil,April29–30,2014.Iamgratefultoall

oftheparticipantsfortheirvaluableinsightsandinputs,ofwhichIhavemadeampleuse.My

thanksgotoBenBeachy,PublicCitizen;GonzaloBerrón,FES;DanielBertossa,PublicServices

International;EstherBusser,InternationalTradeUnionConfederation;AnaCernov,Conectas;

TinaHennecken,FES;ThomasManz,FES;MiguelRodriguezMendoza,InternationalCentreon

TradeandSustainableDevelopment;AdhemarMineiro,Inter-UnionDepartmentofStatistics

andSocio-EconomicStudies,Brazil;AlexandraMontgomery,GlobalJustice;SolPicciotto,Tax

JusticeNetwork;MichellePressend,AlternativeDevelopmentInformationCentre;andAdriana

Rosenzvaig,UNIGlobalUnion.

3


ExecutiveSummary

Thepast30yearsofeconomicglobalizationhavebeen

drivenbyaneoliberaltriadofprivatization,liberalization,

and financialization enormously aided by technologi-

cal and logistical advances. Transnational corporations

(TNCs) have not only reaped enormous benefits from

thisdevelopment,buthavebeenkeydriversofanew

paradigm of international economic and social power

relationsbeyondthenation-state.Today,TNCsandthe

global value networks of production, supply, distribu-

tion, and sales that they control account for 80% of

internationaltrade.Assuch,thereisaneedtoexamine

morecloselythecontextinwhichthiskindofeconomic

poweroperates.Whatkindofrulesandlegalagreements

governTNCoperations?HowdoTNCsbenefitfromand

influencetheexistence(or lack)ofregulation?What is

theroleofdemocraticcontrolmechanisms,andhowcan

theybestrengthened?

This paper addresses the issue of TNC power and the

needfor increasingdemocraticcontrolover it.Empha-

sizingthedemocraticandhumanrightsofcitizensand

thenecessityofcombating»corporatecapture,«ithigh-

lights threepolicyareaswhere thepowerofTNCshas

beenparticularlyevident—investmentregimes,taxation

systems,and labor in thecontextofhumanrights—to

analyzethecurrentsituationandtodiscusspoliticalalter-

natives.Foreachoftheseareas,thediscussionexamines

keyissuesarisingfromtheactionsofTNCs,theirimpacts

onsocio-economicdevelopment,ondemocraticruleand

thebalanceofpowerrelations.Lastly,itcriticallyassesses

theinstitutionalcontextandmajorproblemsgenerated

byneoliberal policies. Basedon this analysis, ideas are

mapped out for possible alternatives, including what

theseentailinregardtopolicyrecommendations.

Basedonthedemocraticdeficitsandthemassivepower

ofTNCsinthethreeareas,there isaneednotonlyto

developspecificresponsesforeachone,butalsotomove

beyond the level of addressing them singly to finding

common ground for a more comprehensive approach.

Analyticallylinkingthesethreefieldsisanessentialstep

towardunderstandingthepowerofTNCsanddevelop-

ing capacities and strategies for democratic responses

withinexistinggovernmentalandinstitutionalchannels

andthroughactivesocietalengagement.Parliamentary

debatesand initiativesareanessentialelement in rais-

ingpublicawarenessandpointingtolegalstepstoward

strengtheningdemocraticregulation.

Democraticresponsestocorporatecapturealsoneedto

beanchoredbroadlyinsociety,aprospectthatwouldbe

greatly enhanced by fostering the multi-organizational

perspectives of alliances, networks, and campaigns by

unions andother civil societyorganizations.Obviously,

inaglobalizingworld,theissueofredressingthepower

imbalancebetweenTNCsandsocietycannotberaised

solelyatthelocalornationallevel.Findingeffectivean-

swersandbuildingdemocraticinstitutionsofregulation

willbeinadequateiftheyarenotdirectedtowardcreat-

ing and strengthening supranational and cross-border

approaches.Tofacilitatesustainableandcomprehensive

change, itwill be essential todismantle existing struc-

turescreatedbyandforTNCsandtoreplacethemwith

structures,policies, andmechanismsof comprehensive

democraticregulation.

1.Introduction

Thepast30yearsofeconomicglobalizationhavebeen

drivenbyaneoliberaltriadofprivatization,liberalization

and financializationaidedenormouslyby technological

andlogisticaladvances.UnderpressurefromtheUnited

States and its industrialized allies, flanked by the sup-

portivepoliciesoftheinternationalfinanceinstitutions,

governmentsthroughouttheworldbeganopeningtheir

economiestoforeignproductsandcapital.Transnational

corporations (TNCs), in particular, reaped enormous

benefitsfromthisnascentdevelopment,becomingkey

driversofanewparadigmofinternationaleconomicand

socialpowerrelationsbeyondthenation-state.

In2011researchersbasedattheTechnologicalInstitute

ofETHZurichpublishedthefirstcomprehensivemapof

globalcorporatecontrol.Theirresearchshowedthat737

companygroups(topholders)controlled80%oftrans-

national corporations. Looking closer, one can identify

anevensmallernucleusof147companiesthatcontrols

about40%ofTNCs.Three-quartersofthesecompanies

are in the financial sector.»We find that transnational

corporations form a giant bow-tie structure and that

a large portion of control flows to a small tightly-knit

core of financial institutions. This core can be seen as

aneconomic‘super-entity’thatraisesnewimportantis-

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suesbothforresearchersandpolicymakers.«(Vitaliet

al.2011:1).

TNCshavebecomethecentralactorsintheworldecon-

omyinthepastdecades.Attheglobal level,thevalue

chains of production and supply dominated by TNCs

(Lakhani,KuruvillaandAvgar2013)areresponsiblefor

80%ofinternationaltradeandaredetermininghowde-

velopingandemergingcountriesareintegratedintothe

global economy (UNCTAD2013).According toReinert

(2005:7),»Ineffecthistoricalexperienceshowsthat[the]

openingupforfreetradebetweennationsofverydiffer-

entlevelsofdevelopmenttendsfirsttodestroythemost

efficient industries in the least efficient countries (The

Vanek-Reinert Effect) ….« As a result, TNCs have not

onlybeenabletovastlyincreasethesalesoftheirfinished

products,buttheyhavealsoconsiderablyexpandedtheir

access to low-paid labor, unfinished goods, and raw

materials.Aboveall, relaxedcapital controlsunleashed

a scramble to attract foreign investment and relocate

financialassetstotaxhavens.TNCstookadvantageof

theirgrowingmarketaccessandused»regimecompeti-

tion«amonggovernmentsto»shop«forefficiencyand

costbenefitsfortheirproductionandsupplyoperations

andtoshieldtheirprofitsfromtaxes(Streeck1992).

AsexplainedbyCrotty(2005:78),neoliberalglobaliza-

tion unleashed productive capacities that outstripped

the growth of aggregate demand, intensified product

competition,andcreateda»shiftfrom‘patient’finance

seekinglong-termgrowthtoimpatientfinancialmarkets

thatraisedrealinterestrates,forcedNFCs[non-financial

corporations] to pay an increasing share of their cash

flowtofinancialagents,drasticallychangedmanagerial

incentives,andhelpedshortenNFCplanninghorizons.«

This process, called financialization, can be defined as

referring»toboththeenhancedimportanceoffinancial

versusrealcapitalindeterminingtherhythmandreturns

expected from investments, and the increased subor-

dination of that investment to the demands of global

financialmarkets«(RossmanandGreenfield2006:55).

Theresultingtriumphof»shareholdervalue«asanew

businessstrategyamongTNCshasliftedtheexerciseof

propertyrightstoexclusiveheightsofpower(Dore2008:

1102).TNCsexpect(anddemand)blue-ribbonprotection

fortheirinvestmentsfromstates,continuouslylobbying

andpressuringformoreprotectionaswellaslessdemo-

craticallymandatedfiscalregulationbygovernmentfor

the common good. They are ready and willing to use

theirpowertoexercisetherightstothearrayofprotec-

tiontheyhaveaccruednationallyandglobally.

Both the development of global value networks and

financialization»are integrally relatedas theyareboth

partofabroaderchange in theeconomy towards the

neoliberal vision of free markets that facilitate move-

mentofgoodsand capital acrossborderswith limited

state regulationor intervention. Indeed, the twooper-

ateintandemandreinforceeachother.MNCstrategies

foroutsourcing,relocationandtheformationofglobal

value chains aredependenton theability to raise and

shiftcapitalacrossnationalbordersaswellasarelative

freedom to repatriate profits or leave them offshore«

(Morgan2014:185).

Have economic globalization and deregulation com-

pletelyfreedTNCsofrulesandcontrolmechanismsfor

governingtheiroperations?Notexactly.Theglobalecon-

omyisfullofrulesandregulations,butwhomdothey

benefitthemost?TNCsseemtohavedonequitewellin

thisregard.Theyoperateunderhighlyenforceablerules

thatprotect themas foreign investors, increase states’

obligations to further their economic well-being, and

regularly involve labormarketderegulation, barriers to

unionism,andreductionorwaivingoftaxrequirements.

Inthiscontext,themorepertinentquestionsarethese:

Who makes the rules, and who benefits from them?

Whobenefitsfromthelackofrulesandfromalackof

democraticcontrol?CanTNCsbecontrolleddemocrati-

cally?Isthereademocraticallybasedapproachtosubor-

dinating»therules-basedlogicofprivatecompaniesto

democraticoversight«(McCallum2013)?

This paper addresses the issue of TNC power and the

needfor increasingdemocraticcontrolover it.Empha-

sizingthedemocraticandhumanrightsofcitizensand

thenecessityofcombating»corporatecapture,«ithigh-

lightsthreepolicyareaswherethepoweroftransnational

corporationshasbeenparticularlyevident—investment

regimes, taxation systems, and labor in the context of

human rights—toanalyze the current situation and to

discusspoliticalalternatives.Foreachoftheseareas,the

discussionexamineskey issuesarisingfromtheactions

ofTNCs,theirimpactsonsocio-economicdevelopment,

ondemocraticruleandthebalanceofpowerrelations.

Lastly, it critically assesses the institutional context and

the major problems generated by neoliberal policies.

Based on this analysis, ideas are mapped out for pos-

5


siblealternatives, includingwhat theseentail in regard

topolicyrecommendations.

2.InvestmentRulesandProtection

Overthepastthreedecades,therehasbeenamassive

increaseintheflowsofforeigninvestment.Measuredin

U.S.dollarsatcurrentpricesandcurrentexchangerates,

inwardforeigninvestmentstockgrewfromalmost$700

billion in1980tomore than$22trillion in2012.Dur-

ingthesameperiod,outwardforeigndirectinvestment

stockrosefromsome$550billiontomorethan$23tril-

lion.1Acloserlookattheforcesbehindthisextraordinary

growthrevealsthatTNCsbasedindevelopedcountries

aredrivingglobalFDIoutflows,whilesuchoutflowsfrom

developingeconomiesarenotgrowingasinthepast.As

UNCTADreported,

Developed-countryTNCsmadeacquisitionslargelyin

otherdevelopedcountries,resultinginahighershare

ofthegroupintotalFDIprojects (bothcross-border

M&Atransactionsandgreenfieldprojects).FDIflows

for greenfield projects alone, however, show that

developed-countryTNCsarecontinuingtoshiftcapi-

talexpenditurestodevelopingandtransitionecono-

mies for their stronger growth potential. (UNCTAD

2012b:5)

TNCinvestmentpoliciesareoftencloselytiedtoandeven

determined by other powerful investors, among them

banksandinvestment,hedge,andpensionfunds.States’

involvementintheinternationalinvestmentregimevaries

dependingontheleveloftheireconomicdevelopment

and their capacity to influence international decision-

makingprocesses.Theleadingindustrializedstateshave

beenattheforefrontofproactivelydevisingandsupport-

inginvestmentrulesfavorabletotheactivitiesofTNCs,

whiledevelopingcountrieshavebeenfarmorelikelyto

beconfrontedby those rules,by thepressure to»sign

on«tothedominantpathofdevelopmentandmarket

access, andby theperceivedneednot tobeunderbid

by erstwhile competitors for TNC investments. States

thatbecomehighlydependenton foreign investments

1. UNCTADSTAT, United Nations Conference on Trade and Develop-ment, (Inward and Outward Foreign Direct Investment Stock, 1980-2013). http://unctadstat.unctad.org/ReportFolders/reportFolders.aspx.ForadefinitionofForeignDirectInvestment(FDI)stockseehttp://data.oecd.org/fdi/fdi-stocks.htm.

byTNCsmaybewellawarethattheseinvestorsarepri-

marily interested in turning a profit for their business.

Yettheyneedtohighlighttheirpromiseofgrowthand

development.

Whileacertaincontingencyusuallysurroundseconomic

risk, TNCs are keen on ensuring that their investment

isprotectedfrom,orat least insuredagainst,potential

political and social risks. Free trade agreements (FTA)

andbilateralinvestmenttreaties(BIT)aretwoprominent

andprevalentstateinstrumentsofTNCinvestmentpro-

tections. Such agreements epitomize both the power

imbalancesbetweenstates,forexamplebetweenindus-

trializedanddevelopingstates,and theways inwhich

policies favoring private interests and limiting the role

ofthestatearebeingpushedforward.Internationalin-

stitutionsalsoplayanintegralpartinpromotingforeign

investment. Local communitiesof consumers,workers,

and their representative organizations, such as trade

unionsandother civil societyorganizations, areat the

receivingend,sotospeak,butwithlittleinthewayofa

democraticvoiceregardinginvestmentdecisions.

2.1TheInternationalInvestmentRegime

As FDI has grown exponentially over the past three

decades,TNCs,withthesupportofthegovernmentsof

their home countries, have been able to construct an

internationalinvestmentregime(IIR)ofrulesandproce-

dures tailoredtosecureandprotect theprofitabilityof

their investment interests. Over the past few decades,

theinstitutionalizationofthisregimehasbeenadvanced

by variousmeans.Among themost important are the

inclusion of trade-related investmentmeasures (TRIMs)

and a financial chapter in regard to the World Trade

Organization (WTO)discussionsonthe liberalizationof

services;thedevelopmentofalargesetofnewguaran-

teesforinvestorsinthemultilateralsystem(forinstance,

through the World Bank), in the »plurilateral« system

undertheOrganisationforEconomicCo-operationand

Development(OECD),andparticularlythroughavastar-

rayofmorethan3,000bindingbilateralandregionalor

bi-regionalinvestmentagreements.

When first conceived and promoted by industrialized

states and international institutions such as the World

Bankandthe InternationalMonetaryFund, the IIR tar-

geteddevelopingcountriesandformercolonieswiththe

http://unctadstat.unctad.org/ReportFolders/reportFolders.aspx

6


statedpurposeofpromotingFDIbyprovidingprivatein-

vestors(suchasTNCs)withstablepoliticalandeconomic

climatesandprotectionforlong-termcapitalinvestment.

Numerous studies, however, have foundno significant

correlationbetweenacountry’swillingnesstosignagree-

mentswithexpansiveforeigninvestorprotectionsandits

abilitytoattractFDI.Moreover,thisproclaimedpurpose

certainly does not explain why trade and investment

agreements between industrialized countries—such as

theComprehensive Employment andTradeAct (CETA)

recentlynegotiatedbetweenCanadaandtheEuropean

Union (EU), or the Transatlantic Trade and Investment

Partnership(TTIP),undernegotiationbetweentheUnited

StatesandtheEU—needtoincluderecognitionoftheIIR.

ThecurrentIIRhasgrownfarbeyonditsoriginallystated

purpose.Asdemonstrated(butcertainlynotopenlypro-

claimed),oneofitsunderlyingimpactsisinthenameof

protectingprivateforeigninvestmentstoinhibitgovern-

ment’sabilitytoenactnon-discriminatorypublicinterest

policies—thatis,labor,environmental,health,financial,

safety,andotherpolicies thatvia regulationmightput

constraintsonforeigninvestors’profit-makingability.

Tothisend,theburgeoning IIRhasfosteredtheestab-

lishmentofinternationaldisputesettlementprocedures

calledinvestor-statedisputesettlement(ISDS).Thismech-

anism—uniquetoFTAsandBITsandconsistingofad-hoc

panels of three lawyers that litigate disputes between

privateinvestorsandstates—elevatesindividualforeign

corporationstoastatusequalwithasovereignnation’s

government. Itempowers investorstobypassdomestic

legal systemsofhost states,gobeforeextrajudicial in-

ternational arbitration tribunals, and directly challenge

publicinterestpoliciesandgovernmentactionsasalleged

violationsof thebroad»rights«grantedby the invest-

mentagreements.Thesetribunalshavelimitedtranspar-

ency,andmoreimportant,lackdemocraticaccountabil-

ity.Theirexistenceandoperationisadirectchallengeto

statesovereignty,astheyhaveprovenwillingtoexplicitly

contradictthepoliciesofnationalgovernmentsinorder-

ingstatestocompensateforeignfirmsforallegedprofit

lossesresultingfromdomesticpublicinterestpolicies.

2.2RegulatoryFrameworkoftheIIR

What are the main institutional elements of the IIR?

Beginning with the multilateral agreements and rules,

thesewouldbe theWTO,WorldBank, andOECD.At

theheartoftheIIRistheWTO,whichfromitsinception

in1995hasbeendrivingthecreationoflegallybinding

multilateral rules on investments. According to Sauvé

(2006),»[T]hemostimportantelementsaretheAgree-

mentonTrade-RelatedInvestmentMeasures(TRIMs),the

Agreement on Subsidies and Countervailing Measures

(ASCM), the General Agreement on Trade in Services

(GATS), the Agreement on Trade-Related Aspects of

IntellectualPropertyRights(TRIPs)andtheDisputeSet-

tlementUnderstanding(DSU).«Thisarchitectureofrules

goeswellbeyondtraditionaltradeandinvestmentissues,

imposing binding limits on non-discriminatory policies,

includingpublic interest lawandregulations,whileex-

tending new »rights« to pharmaceutical corporations,

banks, andotherTNCs.Moreover,whencoupledwith

privatizationpolicies, itpresents lucrativeopportunities

forTNCstouseinvestmentsasprimaryinstrumentsfor

pursuingmarketaccess(Sauvé2006).

TheWorldBankhasenactedpoliciesoninvestmentthat

complementthoseoftheWTO.In1965thebankcreated

the International Centre for Settlement of Investment

Disputes(ICSID)asamultilateralstructureforinvestment

governance.TheICSIDmanagestheConventiononthe

Settlementof InvestmentDisputesBetweenStatesand

Nationals of Other States, which was drafted by the

bank.Theconventioncameintoforcein1966andhas

beensignedby159statesandratifiedby150states(the

so-calledcontractingstates).Thisconventionestablishes

aframeworkunderwhichforeigninvestorscanchallenge

domesticpoliciesininvestor-statedisputes.

Theotherinternationalinstitution,theOECD,hasaless

comprehensive membership, but because it is an eco-

nomicinstrumentofthemostdevelopedandpowerful

countries, its importance isundisputed.TheOECDhas

threemainlegalinstrumentsforinternationalinvestment

andregulatingtradeinservices.2Thefirstinstrumentis

theOECDCodesofLiberalisation.Theseareimplemented

throughpolicyreviewsandcountryexaminations,relying

on»peerpressure«toencourageunilateralratherthan

negotiatedliberalization.AstheInternationalMonetary

Fund (IMF) has acknowledged, »[The] OECD code on

capitalliberalizationhasprovidedahelpfulinstrumentfor

exertingpressureonmembercountriestoliftcontrols.«3

2. OECD,http://www.oecd.org/investment/mne/investmentinstruments.htm.

3. https://www.imf.org/external/pubs/nft/op/214/index.htm.

7


The second OECD instrument is the Declaration and

DecisionsonInternationalInvestmentandMultinational

Enterprises(OECD2012).TheDeclaration,firstadopted

in1976andrevisedandexpandedsincethen,consistsof

fourelements:GuidelinesforMultinationalEnterprises,

asetofvoluntaryrulesofconductformultinationalen-

terprises; National Treatment Agreement, according to

whichadheringcountriesshouldgrantforeign-controlled

enterprisesontheirterritorytreatmentnolessfavorable

thanthataccordedinlikesituationstodomesticenter-

prises;theConflictingRequirementsAgreement,which

encouragecountriestocooperatetoavoidorminimize

the imposition of conflicting requirements on multina-

tional enterprises; and International Investment Incen-

tivesandDisincentives,inwhichthesignatorycountries

recognizetheneedtogivedueweighttothe interests

ofadheringcountriesaffectedbylawsandpracticesin

this fieldandendeavor tomakemeasuresas transpar-

entaspossible.ThethirdOECDinstrument,theso-called

ConventiononCombatingBriberyofForeignPublicOffi-

cialsinInternationalBusinessTransactions(OECD2011),

makes itacrimetooffer,promise,orgiveabribetoa

foreign public official to obtain or retain international

business deals. The convention has been signed by all

OECDcountriesandbyseveralnon-OECDcountries.

Anothermarkof economicglobalizationhasbeen the

proliferationofregionalfreetradeagreementsandother

regional treaties that cover foreign direct investment,

portfolioinvestment,orboth.Therearemanyexamples

of regional investmentagreements.Theydiffer in rules

andscope,butforthepurposeshere, itsufficestofo-

cusonexamplesfromthetwomostpowerful regional

organizations: the freemovementof capital provisions

of theEUand theChapter11provisionsof theNorth

AmericanFreeTradeAgreement(NAFTA).

In the EU, the free movement of goods, persons, ser-

vices,andcapitalhasbeenestablishedand recognized

asoneofthebasicprinciples,guaranteedbytheunion

andrespectedbyallmemberstates.Bycontrast,NAFTA’s

Chapter 11 goes beyond recognizing the principle of

thefreemovementofcapitaltoestablishawholenew

setofbroad, substantive»rights« for foreign investors

andaninvestor-stateprocedurethatempowersforeign

investors to privately enforce these rights by challeng-

ing domestic laws and regulations before extrajudicial

tribunals.NAFTAstipulates that theproceduresagreed

upontogovernthisinvestor-stateprocessshouldadhere

totheWorldBank’sICSIDconventionorthearbitration

rulesoftheUnitedNationsCommissiononInternational

TradeLaw(UNCITRAL).Accordingtothenongovernmen-

tal organization (NGO) Public Citizen, NAFTA was the

first regional agreement to emphasizegranting special

rights to foreign investors and restricting states’ ability

toregulateinvestorsthroughenvironmental,health,and

otherrequirements:

NAFTA’sextremeruleshavebeenreplicatedinvarious

U.S.»freetrade«agreements,includingCAFTA,and

bilateralFTAswithPeru,Oman,Korea,Panamaand

Colombia.

Thesespecialprivilegesprovideforeigninvestorsrights

toownandcontrolothercountries’naturalresources

andland,establishoracquirelocalfirmsandtooper-

atethemunderprivilegedtermsrelativetodomestic

enterprises.Thescopeofthe»investments«covered

bytheserulesisvast,includingderivativesandother

financial instruments, intellectual property rights,

government licenses and permits, as well as more

traditional forms of investment. The pacts provide

foreign firms with a way to attack domestic public

interest, landuse, regulatoryandother laws if they

feelthatadomesticpolicyorgovernmentdecisionhas

undermined the firms’ new »trade« pact privileges,

suchasbycontraveningtheir»expectations«(Public

Citizen2014).

Thiskindofbroadinvestorprotectionwouldbeexpanded

furtherunderoneofthemosthigh-profileregionalagree-

ments—theTrans-PacificPartnership(TPP),betweenthe

UnitedStatesand11PacificRimcountries—whichisstill

undernegotiation.Asproposed,theTPPwouldbuildon

theNAFTAinvestor-statemodel,extendittoadditional

countries,andexpandthearrayofdomesticpoliciesthat

foreigninvestorscouldchallenge.Formalacceptanceof

suchprocedures in theTPPwould then surelybecome

thebottomlineintheongoingnegotiationsbetweenthe

UnitedStatesandtheEUfortheTTIP.

Finally, bilateral and bi-regional agreements are also

powerful instruments of the IIR. According to recently

publishedUNCTADdata,in2012thereweremorethan

2,800 BITs and another 340 treaties with investment

chapters.TheTTIPaswellasthenearlycompletedCETA

between the EU and Canada represent current high-

profile examples of these kinds of agreements. They

8


focusoninvestmentprovisions(aswithBITs)orcontain

suchprovisionsaspartofabroadertradeagreement(as

withTTIP).Usuallybilateralinvestmentagreementscover

onlyFDIs,butsomeofthemalsoincludeportfolioinvest-

ments.Mostempowerforeignfirmstopursueinvestor-

statedisputesettlementunderthearbitrationprocedures

oftheWorldBank’sICSIDconventionortheframework

establishedbyUNCITRAL.

Ifadopted,TPP,CETAandTTIPwouldgobeyondWTO

provisions,creatingamoreexpansivesetofconstraints

ondomesticregulationsandabroadersetofrightsfor

investors.Indeed,mostBITsandtradeagreementswith

investor provisions extend well beyond obliging states

to provide foreign investors national treatment and

most-favored-nation treatment.Many require states to

guaranteeforeignfirmsa»minimumstandardoftreat-

ment« that includes »fair and equitable treatment,« a

vagueresponsibilitythathasbeeninterpretedbroadlyby

investor-statetribunalstoincludeanobligationbygov-

ernments to provide a »stable regulatory framework«

thatconformstoinvestors’expectations.Tribunalshave

ruledthatthecreationofnewregulations,suchasone

mightexpecttoseeinresponsetofinancialorclimatic

crisesoremergentconsumerconcerns, canviolate the

»fairandequitabletreatment«obligationbyfrustrating

foreigninvestors’expectations.

Manyinvestor-stateawardsagainstgovernments’public

interestpolicieshavebeen»won«bytheforeigninvestor

onthebasisofsuchobligations.Inaddition,manyBITs

andtradeagreementscontainrulesbroadlyprohibiting

expropriationofprivate investments.Tribunalshave in-

terpreted these terms as allowing foreign investors to

demand taxpayer compensation for non-discriminatory

domesticregulationsthattheydeemas»indirectexpro-

priations«fordiminishingthevalueoftheirinvestment.

Suchexpansive foreign investor»rights« surpass those

affordedtodomestic firmsundermostcountries’ legal

systems.

2.3DisputeMechanismsandProcedures

As noted, BITs and trade agreements with investment

provisions have established a parallel system of law,

drawing on convention and treaty frameworks under

theauspicesoftheWorldBankandtheUnitedNations

andusingtheISDSsystem,whichexistsoutsidetheju-

risdictionofnationalcourtsystems. ISDSwasoriginally

intendedtoenableforeigninvestorstoseekcompensa-

tion if »ahostgovernment expropriated their plantor

landand thedomestic court systemcouldnotprovide

ameansforfaircompensation,«buttodaytheoriginal

provisions are being interpreted and used much more

broadly,thuscomprisingwhatamountsto»analarming

two-tracksystemofjusticethatprivilegesforeigncorpo-

rations«(Earthjusticeetal.2012).

According to statistics compiledbyUNCTAD for2013,

there were at least 57 investor-initiated cases regard-

ing international investment agreements. This nearly

matchedthepreviousyear’s recordnumberof58new

claimsbyinvestorsagainststatesunderISDSprocedures.

Indeed,whilenomorethan50total investor-statecases

were launched during the system’s first four decades,

corporationshave initiatedmorethan50 investor-state

cases ineach of the last threeyears.Thescopeofdo-

mesticpoliciesthatTNCsarechallenginginthesecases

hasgrowntoincludehealth,tobacco,naturalresources,

finance, the environment, oil and gas extraction, land

use,transportation,renewableenergy,toxinsandother

publicinterestpolicies(UNCTAD2014).

The extrajudicial ISDS tribunals of three private sector

lawyerswhodecidesuchcasesarenotboundbyprec-

edent,theopinionsofthestate,oranymeaningfulap-

pealssystem.Iftheydecidethatthechallengeddomestic

policyviolatesoneoftheinvestorprotectionsinatrade

agreementoraninvestmenttreaty,theyarefreetoorder

taxpayer compensationof theamount they choose, in

additiontocompoundinterest,andtorequirethegov-

ernment to pay the investors’ tribunal costs and legal

fees. The penalties imposed by investor-state tribunals

havebeengrowingsharply.In2012,atribunalordered

Ecuadortopay$2.3billioninfinesandinterest—equiva-

lenttothegovernment’sannualexpenditureonhealth

care for half the population—to an oil firm, although

thetribunalacknowledgedthatthefirmhadbrokenEc-

uadorianlaw4.Evenwhengovernmentswincases,they

oftenmustpaytheirowntribunalandlegalcosts,which

average$8millionpercase.Innumerousinstances,the

lawyersonthetribunalshavealsoservedasboardmem-

4. TheU.S.CompanyOccidentalPetroleumCorporationsuedEcuadorforhavingcanceleditsoperatingcontractin2006.Theauthorities’argu-mentatthetimewasthatthecompanyhadillegallytransferredaportionofitssharestoaCanadiancompany.http://justinvestment.org/2012/10/icsid-orders-ecuador-to-pay-1-7-billion-to-occidental-petroleum-inter-view-with-the-ecuador-decide-network/.

http://justinvestment.org/2012/10/icsid-orders-ecuador-to-pay-1-7-billion-to-occidental-petroleum-interview-with-the-ecuador-decide-network/http://justinvestment.org/2012/10/icsid-orders-ecuador-to-pay-1-7-billion-to-occidental-petroleum-interview-with-the-ecuador-decide-network/http://justinvestment.org/2012/10/icsid-orders-ecuador-to-pay-1-7-billion-to-occidental-petroleum-interview-with-the-ecuador-decide-network/

9


bersorattorneysforthecorporationsbringingthecases.

There arenomeaningful conflictof interest rules, and

mostattemptstoremovetribunalmembersforexhibit-

ingbiashavefailed.Ahandfulofinvestmentlawfirms

havejoinedthelitigationboomandnowdominatethe

business(EberhardtandOlivet2012).

Tradeunionshavevoicedtheirconcernovertheexistence

andproliferationofthisnontransparentandanti-demo-

craticsystem,whichendangersthedomesticpolicyspace

formeetingsuchpublicpolicyobjectivesaslaborrights,

environmental protection, and the provision of public

goods.AstheOECD’sTradeUnionAdvisoryCommittee

haswritten,»[T]radeunionsareopposedtotheinclusion

ofsuchISDSprovisionsininvestmenttreaties.Theother

keyconcernistobalancetherightsandobligationsofin-

vestorsandpromotehumanrights,labourrightsanden-

vironmentalstandardsthroughcommitmentstocomply

withILOcorelabourstandardsandotherhumanrights

undertheILOMNEDeclaration,theUNGuidingPrinciples

andtheOECD-GuidelinesforMultinationalEnterprises«

(TUAC2013).Inaddition,attheWorldCongressofthe

InternationalTradeUnionConfederation (ITUC)held in

Berlin (19–23 May 2014), participants adopted a new

tradeandinvestmentmodelthatincludesacampaignto

opposeISDS,supportforafinancialtransactiontax,and

mobilizing »all available international instruments« to

tamecorporatepower.5Notwithstandinggrowingcon-

cernsabouttheexistinginvestmentregime,thenegotia-

tionsfornewmega-regionalagreementswithISDS,that

is,TPPandTTIP,runtheriskofconsolidatingtheexisting

investmentregimeanditsasymmetricfeaturesfavoring

thepoweroftransnationalcorporations.

2.4Alternatives

Consideringthatthere isademandandaneedforan

IIR thatactuallypromotes sustainabledevelopment,an

alternative approach is necessary. This conclusion has

already compelled a growing number of developing

countriestorejecttheestablishedinvestor-statesystem

as inhibiting health, environmental, financial, and de-

velopment policies while failing to attract greater FDI.

CountrieslikeSouthAfrica,Ecuador,andIndonesiaare

5. Sustainable Jobs, Secure Incomes and Social Protection, resolutionadoptedatthe3rdITUCWorldCongress,Berlin,18–23May2014,http://congress2014.ituc-csi.org/IMG/pdf/ituc-3co-e-6_b_-sustainablejobs-en-210x297-01-3.pdf.(2014.12.06).

intheprocessofterminatingtheirexistinginvestor-state

pacts,whileIndiaiscontemplatingthesame,andBrazil

continuestorefusetobeboundby investor-statetrea-

ties.Thesepoliciesneedtofindbroadlybasedsupportin

civilsociety,notonlyinthecountriesthathaveembarked

onapathofcriticalrevieworabstentionregardingISDS,

butinothercountriesaswell.

ThealternativewouldbetoreplacethecurrentIIRand

ISDSwithademocraticframeworkinwhichtheinterests

ofthoseaffectedbyTNCinvestmentscanbearticulated

andarenot subordinated to thoseof investors. States

andgovernmentsneedtobeabletoregainspacetoim-

plementdemocraticallydeterminedsocialandeconomic

policies that benefit workers, consumers, the environ-

ment,anddevelopment.Domesticcourtsaccountableto

ademocraticallycreatedandpredictablesystemof law

aretheproperlegalforafordisputeresolution.Moreover,

a newly constructed IIR would go a long way toward

establishingaworkable,democraticallylegitimatecanon

of rules for investorsby recognizingand incorporating

internationalstandards,amongthemtheILO’scorelabor

standardsandtheILOTripartiteDeclarationofPrinciples

concerning Multinational Enterprises and Social Policy,

theUNGuidingPrinciplesonBusinessandHumanRights,

andtheOECDGuidelinesforMultinationalEnterprises.

2.5RecommendationsandtheWayForward

The primary goal is to first dismantle the current ISDS

systemthroughpressureonnationalgovernmentstoter-

minatetreatiescontainingISDS,withdrawconsentfrom

ISDS arbitral forums, and refuse to recognize investor-

stateawards.Decisionsalreadytakenbyseveralgovern-

mentstoannulISDScommitmentsshouldbesupported.

Atthesametime,itiscrucialtobeabletoexcludethe

existing ISDSfromfuture investmentandtradetreaties

andthosecurrentlyundernegotiation,inparticularthe

TTIPnegotiations.

Thelong-termgoalistoreplacetheexistingIIRwithone

that integratesacomprehensiveframeworkof interna-

tionalauthoritativeagreements,includingthecorelabor

standardsof the ILOand the ILOTripartiteDeclaration

of Principles concerning Multinational Enterprises and

SocialPolicy, theUNGuidingPrinciples,andtheOECD

Guidelines for Multinational Enterprises. All of these

instruments have gained international recognition and

http://congress2014.ituc-csi.org/IMG/pdf/ituc-3co-e-6_b_-sustainablejobs-en-210x297-01-3.pdfhttp://congress2014.ituc-csi.org/IMG/pdf/ituc-3co-e-6_b_-sustainablejobs-en-210x297-01-3.pdfhttp://congress2014.ituc-csi.org/IMG/pdf/ituc-3co-e-6_b_-sustainablejobs-en-210x297-01-3.pdf

10


have been signed onto by transnational corporations

and employer representatives. A truly democratically

controlled IIR should enable the role of public finance

tobestrengthenedanddevelopmentgoalstobedeter-

mined through citizenparticipation anddemocratically

mandatedpublicinstitutions.Thiswouldunderscorethe

importanceofexemptingpublicservicesfrombeingun-

dercutandunderminedbysuchagreements.

A relatedmeasure thatwould support such long-term

goals this general development could be in the form

of demands by trade unions, workers, and general

stakeholders tohaveastrongervoice in thecontrolof

investmentdecisionsmadebyfundstowhichtheyhave

contributed.InGermany,forexample,thepensionfund

Metallrente, in themetalworking industry, iscontrolled

bytheresponsibletradeunion(IGMetall)andtheem-

ployers’association(Gesamtmetall)throughacoopera-

tivearrangement.

To achieve the above goals, it is essential to build an

understandingof the IIR issue throughcriticalanalyses

andthepromotionofeducationalforumsforcitizens.A

keyelementinthisapproachistoinvolvetradeunions

andothercivilsocietyorganizationsinputtingthisissue

on the public and political agendas. Beyond exposing

thescandalofTNCinvestmentbehaviorandthespread

of»corporatecapture«becausesuchdealingscontradict

democraticnormsandpractices,theseorganizationshave

acontributiontomake indraftingamodel investment

policy throughparticipatoryconsultations,suchas that

proposedbytheEuropeanTradeUnionConfederation.6

Consultationsconcerningthedevelopmentofmodelsfor

embeddinginvestmentpracticesinademocraticallycon-

trolledcontextwilllogicallyalsorequire(andbeinneed

of)ongoingcontributionsfrompoliticalparties.

3.Taxesandnewbusinessmodels

Overthepastdecadetherehasbeenagrowingaware-

ness that financialization has been the main driver of

business restructuring, including outsourcing and off-

shoring,andthemassivespreadofglobalvaluenetworks.

Asexplainedabove,financializationhasasmuchtodo

with the subordination of all corporate operations to

6. SeealsotheResolutiononinvestmentpolicypublishedbytheEuro-peanTradeUnionConfederation,http://www.etuc.org/documents/etuc-resolution-eu-investment-policy#.VIRQbGdD5wE(2014.12.06).

shareholdervalueaswithprotectingcorporatefinancial

gainsfromtaxation,avoidingtaxesviarestructuring,and

carryingoutareorganizationofproductionandsupply

(withavarietyofknownharmfuleffectsonworkers’re-

muneration,accesstoinformation,collectivebargaining,

andotheremploymentrights).

While most trade unions have only recently begun to

pointtotaxavoidanceanditsimpactonworkers,7public

sector unions have for some time been confronted by

theirramificationsforstatepoliciesandservicesfunded

bytaxation.Taxesareapublicgood,essentialtofund-

ingstateeconomicdevelopmentgoals,pursuingsocial

priorities(includingpublicservices),addressinginequali-

ties,andcounteractingmarketfailures,especiallywhen

dealing with externalities. In addition, dwindling cor-

porate tax revenuesgohand-in-handwith cutbacks in

taxadministration, includingauditingcapacities. In the

Netherlands,forexample,thechanceofabusinessbeing

auditediscurrentlyonceevery43years.

Ontheotherhand,thetaxarbitragegameofTNCshas

become a quite lucrative business for such private in-

terests as accountants and law firms. Rising corporate

profitshavenotresultedinincreasedtaxrevenuesfrom

TNCs. As the OECD reports, »In fact, on average, the

opposite ishappening. . . . [O]naverage,MNCspay5

percent in corporate tax, while small companies pay

around30percent.«8Fortheirpart,stateandlocalgov-

ernments in both developing and developed countries

havefoundthemselvesinintensecompetition,so-called

beautycontests, toattractTNC investmentsbyprovid-

inglucrativetaxincentiveswhileeitherreducingservices

orraisingworkers’taxesorboth.Workers,too,maybe

directly affected by TNC restructuring for tax reasons.

Whilethecurrentinternationaldiscussionsofpoliciesto

curtail tax evasion, in particular at the OECD and the

IMF,areencouraging,inlightofdivergentinterests,itis

hardly imaginablethatdespite itsdysfunctionalnature,

thepresentsystemislookingatathoroughoverhaulin

themaking.9

7. See,forexample,ReportonaGlobalUnionsMeetingonTaxPlan-ning,http://www.tuac.org/en/public/e-docs/00/00/0D/FE/document_doc.phtml.

8. OECD, »OECD Urges Stronger International Co-Operation on Cor-porateTax,«pressrelease,2013,http://www.oecd.org/newsroom/oecd-urges-stronger-international-co-operation-on-corporate-tax.htm.

9. OECD,ActionPlanonBaseErosionandProfitShifting,Paris,2013,http://www.oecd.org/ctp/BEPSActionPlan.pdf; International MonetaryFund,»SpilloversinInternationalCorporateTaxation,«IMFPolicyPaper,

11


3.1SeparateEnterprise-Arm’sLengthPrinciple(SE-ALP)

Evidence recently publicized of widespread and far-

reaching tax avoidance by transnational corporations

showsthattheexistingsystemforassessingtheprofits

of such firms and apportioning those profits between

countriesisdysfunctional.Theflawisthefailuretotreat

multinationalsaccordingtotheeconomicrealityoftheir

operationsasintegratedfirmsundercentraldirection.In-

stead,aprinciplehasbecomegraduallyentrenchedthat

theyshouldbetaxedasiftheywereseparateenterprises

ineachcountrydealingindependentlywitheachother:

theseparateenterprise-arm’slengthprinciple(SE-ALP).

Internationaltaxtreatyprovisionsarestillbasedonmod-

elsdraftedundertheLeagueofNationsin1928,when

internationalinvestmentconsistedmainlyofloans.10The

treaty models give the investor’s state of residence (or

homecountry)theprimaryrighttotaxincomefromin-

vestment(interest,dividends,fees,androyalties),while

ahostcountrywhereabusinessislegallylocatedcantax

itsprofits.Fewmultinationalshademergedbythe1920s,

andtheruleswereadaptedforthem,requiringbranches

and affiliates in different countries to be treated as if

theywere independententitiesdealingatarm’s length

witheachother.

Thiscreatesaperverseincentiveformultinationalcompa-

niestocreatecomplexcorporatestructurestoavoidtax

aswellasotherformsofstateregulation.Forexample,

FTSE100companieshave34,216subsidiarycompanies,

jointventures,andassociates,including8,492intaxha-

vensthatlevylittleornotaxoncorporateprofits.11Under

currentpractice,theyarealltreatedasseparatetaxable

entities even though they have common shareholders,

boards of directors, strategies, logos, and websites. In

thepastfewdecades,tax-drivencorporaterestructuring

hasmushroomed,usingcomplexstructuresdesignedto

WashingtonD.C.,http://www.imf.org/external/np/pp/eng/2014/050914.pdf.

10.Formoredetailedtreatment,seeSolPicciotto,International Business Taxation (1992),http://taxjustice.blogspot.be/2013/06/international-busi-ness-taxation.html,andSolPicciotto,»IstheInternationalTaxSystemFitforPurpose,EspeciallyforDevelopingCountries?«ICTDWorkingPaper13,2013,http://www.ictd.ac/sites/default/files/ICTD%20WP13_0.pdf.

11.TheFTSE100Indexliststhetop100companiesontheLondonStockExchangethathavethehighestmarketcapitalization.http://en.wikipedia.org/wiki/FTSE_100_Index.SeealsoActionAid.2011.AddictedtoHavens.The Secret Life of the FTSE 100, http://www.actionaid.org.uk/sites/de-fault/files/doc_lib/addicted_to_tax_havens.pdf(2014.12.06).

takeadvantageofnationaltaxrules,especiallyregarding

whereacompanyisconsideredtoberesident,andwhere

its sourcesof incomeare located.While taxevasion is

clearlyillegal,casesoftaxavoidance,oftenagrayarea

of compliance, are growing. In simplified terms, three

stagesandtypesofstructurecanbeidentified.

First,andmostbasic,isa»steppingstone«arrangement

byTNCs.Anoperatingaffiliate inonecountry (source)

cancontractforservicesperformedbyanotheraffiliate

inanothercountry.Thepaymentsitmustmakeforsuch

servicesmaybebookedasanexpense, representinga

deductiblesum inregardto its taxablebusinessprofits

initscountryofoperation.Thesepaymentsflowoutof

the country to one or more affiliated holding compa-

nies inacountrywithsuitabletaxtreaties,suchasthe

Netherlands,Switzerland,orSingapore,wheretheywill

bebookedasincomesubjecttonoorlowwithholding

taxes.Thebulkof the incomeof thesourceaffiliate is

passedthroughthisconduit,leavingitwithonlyanomi-

nal level of profit, to a»base«affiliate in a classic tax

haven,suchasBermudaortheCaymanIslands,thatdoes

nottaxsuchprofits.

Second, these companies began to reorganize their

operations toexploit taxadvantagesofferedby states.

Inthe1990s,competitiontoattractinwardinvestment

ledmanycountriestoprovidetaxholidays,whichwere

especially lucrative for mobile businesses. This type of

taxavoidancehasbeenhardtocombat,becausethese

affiliatesarenotmereletterboxcompaniesreceivingonly

»passiveincome«,butactuallyrepresentoperatingbusi-

nesses.

Third,buildingonthistaxstrategy,corporationsbegan

to reorganize their legal structures by splitting various

functionsandassigningthemtoaffiliatesorganizedor

locatedtominimizetax.TNCshavelongbeenawareof

thedisparateandfragmentednatureoftaxlawsacross

countriesandlocalities,inadditiontolawsthatprotect

information about their bank-held assets from foreign

taxauthorities.But itbecamemucheasierforthemto

exploit these mismatches with the shift to the digital

economy,whichgreatlyfacilitatedinternationalcommu-

nication,enablingfirmstomanagetheirownglobalvalue

chains(GVCs)andtodealwithcustomersanywherein

theworld.Forexample,salestocustomerscantypically

bebookedtooneaffiliate,whileothersdealwithsuch

activitiesasmarketing,customersupport,delivery,and

http://en.wikipedia.org/wiki/FTSE_100_Indexhttp://en.wikipedia.org/wiki/FTSE_100_Indexhttp://www.actionaid.org.uk/sites/default/files/doc_lib/addicted_to_tax_havens.pdfhttp://www.actionaid.org.uk/sites/default/files/doc_lib/addicted_to_tax_havens.pdf

12


logistics.Amazon inEurope separates the functionsof

salesandwebsiteoperation(attributedtoAmazonSARL

Luxembourg)fromcustomersupport,warehousing,and

orderfulfillment,whicharedoneineachcountryclose

toitscustomers.

AsOxfamhasreported12,thereareseveralstudiesthat

question the efficacy of providing tax incentives as a

means of attracting foreign investment. And in 2012,

UNCTAD, in its»InvestmentPolicy Framework forSus-

tainableDevelopment,«warned that the»general cor-

porateincometaxregimeshouldbethenormandnot

theexceptionandproliferationoftaxincentivesshould

beavoidedastheyquicklyleadtodistortions,generate

unintendedtaxavoidanceopportunities,becomedifficult

tomonitor,createadministrativecostsandmayendup

protectingspecialinterestsattheexpenseofthegeneral

public«(UNCTAD2012a:37).Besidesaccesstonatural

resources, the key determinants of a country’s ability

toattractFDIarepoliticalandmacroeconomicstability,

aneducatedworkforce,good transport,electricityand

telecommunications infrastructure, and large markets,

andlaborcosts,mostofwhicharefinancedthroughthe

paymentoftaxes.Empiricalstudiesdonotshowthetax

environment to be a key driver of foreign investment.

Suchtaxincentivesare,ineffect,agovernmenttrade-off,

designedtosubsidizebig(international)businesstothe

detrimentofcitizens’socialwelfareandtheprovisionof

publicgoods.There isanurgentneedformeasuresto

reversecompetitionforFDI,asitonlyservestodrivetax

revenuesdownward.

Themassiveerosionofstatetaxbasesthroughtheag-

gressive tax avoidance policies of corporations, in par-

ticularTNCs,hasbecomeahotlydebatedpoliticalissue

in many countries, especially in light of the austerity

measures takenby (or forcedupon) governments that

severelydownsizedsocial services.Numerousexamples

of tax avoidance by such brand name firms as Apple,

Google,andAmazonalongwiththeuncoveringofbank-

assistedtaxevasionschemesforindividualshavehelped

tocreatepoliticalpressureforcross-countryreform.At

theSeptember2013G20meetinginSt.Petersburg,the

CommitteeonFiscalAffairsof theOECDwascharged

with developing reform proposals. Those put forward

in its Action Plan on Base Erosion and Profit Shifting,

12.See http://www.oxfam.org/en/pressroom/pressreleases/2013-09-01/tax-evasion-damaging-poor-country-economies.

however,aimonlyatpatchingthecurrentsystem.13The

OECD clearly avoided tackling the current taxation re-

gime’sfundamentalflaws,whichresultfromtheseparate

enterprise-arm’s lengthprinciple intaxtreaties. Indeed,

itsactionplan(para.14)explicitlyrejectsanymoveto-

ward »formulary apportionment.« The main objection

citedisthatwhateverthetechnicalmerits, itwouldbe

difficult or impossible to reach political agreement on

suchasystem.Yettheattempttostrengthentheexisting

systemintheplanisalsofraughtwithpoliticaldifficul-

ties.Indeed,inmanyrespectsitisarecipeforgenerating

conflictsamongstates,leadingeachtotrytomodifyor

interprettherulestograbalargershareofthetaxbase.

The most positive immediate improvement is likely to

beareformproposaltocreatemoretransparency.This

wouldnotbeamajorchange,but itwouldsatisfythe

explicitG20mandatetoestablishaglobaltemplatefor

multinationalstoprepareandsubmitacountry-by-coun-

tryreportforallcountrieswheretheydobusiness.Trade

unionsandNGOsfavorthisstep,butitscomprehensive-

nessandimplementationarestillupintheair.Asalways,

thereareextensivelobbyingeffortsbybusinesstorestrict

thescopeofsuchreportsandtokeepthemconfidential

to taxauthoritiesandoutof thepublicdomain.These

effortsshouldberesisted.

3.2Alternatives

Whatclearlyseemsnecessaryistoreorientinternational

tax rules and place them on a more realistic and just

foundation. For taxation purposes, TNCs need to be

treatedassinglefirms, insteadoftheunrealisticfiction

that they are a loose collection of separate and inde-

pendententitiesineachcountry.Theaimshouldbe,as

theG20 leadersdemanded in the2013St.Petersburg

Declaration,reformstoensurethatcompaniesaretaxed

»whereeconomicactivitiestakeplaceandvalueiscre-

ated.«SuchreformsareessentialtobringingTNCsback

intonationaltaxsystemsandcontributingtheirshareto

thequalityofinfrastructureandinstitutionstheyrelyon

fortheirbusinessactivities.Overthepastdecades,TNCs

haveusedtheireconomicpowerregardinginvestments

aswellas thevast financial reserves theycommandto

leveragedifferencesinnationaltaxsystems

13.http://www.oecd.org/ctp/BEPSActionPlan.pdf

http://www.oxfam.org/en/pressroom/pressreleases/2013-09-01/tax-evasion-damaging-poor-country-economieshttp://www.oxfam.org/en/pressroom/pressreleases/2013-09-01/tax-evasion-damaging-poor-country-economies

13


In theareaoftaxpolicy,corporatecapturebothdrives

and uses state beauty contest competitions for their

monies.As such,existing institutionscanhardlybe re-

liedon to formulate thekindof fundamental changes

thatare inorder,especially since theyare thepreserve

of a closednetworkof technical specialists dominated

bytaxadvisers,reinforcedbyarevolvingdoorbetween

the public and private sectors. The announcement by

theEUCommission(summer,2014)thatitwouldlaunch

an investigation of prominent corporate tax evaders,

among them Apple, Starbucks, and Fiat, in regard to

statesubsidyregulationsmaybelittlemorethanapublic

relationsmove.14Whatisneededisamuchbroaderand

better-informedpublicdebate,bothatthenationallevel

aswellasinternationally,suchasthepastdebatesover

afinancialtransactiontax(towhichitcouldcertainlybe

linked).15LocalandnationaltaxpoliciesconcerningTNCs

needabasicoverhaul,andatthesametimethereneeds

tobecross-countrycoordinationofthisrestructuringpro-

cess toensure itseffectivenessandreduce the ruinous

competitionthathascutsodeeplyintopublicbudgets.

Agroupofcivilsocietyorganizationswiththeaboveaims

has issuedacallforestablishinganIndependentCom-

missiononInternationalCorporateTaxation(ICRICT)to

fosterapublicdialogueandpoliticalmomentumforsuch

reform.16Althoughthisisaveryrecentdevelopment,and

generalproposalshavenotyetbeenpresented,itisthe

kindofinitiativethatcouldgeneratethenecessarymo-

mentumforchange.


ConsideringthattheoverallgoalistolinkTNCtaxpoli-

ciestoprinciplesofcorporateaccountabilitytowardthe

communities and countries in which they operate and

14.See http://www.businessweek.com/articles/2014-06-11/europe-launches-a-fresh-assault-on-tax-deals-for-apple-starbucks, June 11,2014.

15.Recently,thefocusofthedebatehasshiftedfromtheprosandconsofaglobaltax,theso-calledTobinTax,tomorespecificproposalsintheEU(financialtransactiontax)andtheUnitedKingdom(RobinHoodtax).Thesedebates,however,arenotcenteredonTNCs,butonthefinancialsectoringeneral.

16.Thedevelopmentofthisproposal,announcedmid-2014,issupportedby a preparatory group comprised of individuals representing the fol-lowingorganizations:ActionAidUK,AllianceSud,CCFD-TerreSolidaire,ChristianAid,CouncilforGlobalUnions,GlobalAllianceforTaxJustice,Oxfam,PublicServicesInternational,TaxJusticeNetwork,andtheWorldCouncilofChurches.SeethereportissuedbyTransparency-Initiativeathttp://www.transparency-initiative.org/wp-content/uploads/2014/09/TAI_TaxandDevelopment_FULL_OCT14.pdf.

tobolstercross-countrysolutionsbasedoninternational

normsandguidelines,itisabsolutelyessentialtoelimi-

nate the separate enterprise-arm’s length approach in

favorofunitarytaxationofTNCs.Thisentailsintroducing

top-downallocationof tax revenuesbasedonaTNC’s

consolidated income statement. Top-down allocation

is a more superior method for adequate reporting on

thegeographicaldistributionof incomesprovided that

therearesufficientsafeguardsthatallowtaxauthorities

andothergovernmentadministratorstocross-checkand

verifythereliabilityofthereportingprocess.Thiswould

inturnnecessitatepoliciesdesignedtofostertranspar-

encyanddataexchangeaswellas the introductionof

comprehensiveandpublic,country-by-countryreporting

byTNCs,includingspecificinformationonemployment,

business restructuring,andkeydecisioncenters (public

disclosure).

In support of this fundamental change in the taxation

ofTNCs,itwouldbenecessarytodevelopstatetaxlaws

that restrict or prohibit capital flight. The introduction

ofaglobal(oratleastregional)financialtransactiontax

wouldbeoneofthemeansofreturningTNCassetsand

businessprofitstothesocialenvironmentinwhichthey

have been accumulated. Such measures will necessar-

ily require theeliminationof treatyprovisions that, for

example,bancapital controls, including inagreements

currentlyundernegotiation(TTIPandTPP).Tobeeffec-

tive, such policies also need to be closely coordinated

withthechangesintheinternationalinvestmentregime

proposedintheprevioussection.

Movingforwardtoachievethesegoalswillnecessitate

havingabroadpublicdebateonthedestructiveinfluence

ofcorporatecaptureandthegrowingneedforinvesting

inimprovedpublicinfrastructureandinstitutions:schools,

hospitalsandhealthcare,publicspacesandcommunity

centers,publictransportation,andsoon.Exposingthe

scandalofcorporatetaxavoidanceandraisingdemands

fortaxjusticelocally,nationally,andgloballyisanimpor-

tantstepinraisingawarenessandreframingthedebate.

Crucialsupportforpoliticalandlegalinitiativesneedsto

bedevelopedthroughcapacitybuildingintradeunions

andothercivilsocietyorganizationsregardingtaxpolicies

andtheirrelationshiptoTNCrestructuring,employment,

andqualitypublicservices.

Internationally,campaignsfortaxjusticeatthelocalor

national level could be flanked by strategies aimed at

http://www.transparency-initiative.org/wp-content/uploads/2014/09/TAI_TaxandDevelopment_FULL_OCT14.pdfhttp://www.transparency-initiative.org/wp-content/uploads/2014/09/TAI_TaxandDevelopment_FULL_OCT14.pdf

14


submittingOECDcomplaintsbasedonChapterXI(Taxa-

tion)of theGuidelines forMultinationalEnterprises. In

thiscontext,suchactivitiescouldalsoservetodevelop

conceptsfornewglobalgovernance institutionstoad-

ministeragloballyconstructedandmoreequitable tax

system.

4.LaborandEmploymentintheContextofHumanRights

Transnationalcorporationsarethedrivingforcebehind

thegrowingintegrationofworldtradeandtheincreas-

ingglobaldivisionoflabor.Indeed,oneofthemostvis-

iblemarksofglobalizationisthecapacityofTNCstopro-

duceandsourceaccordingtotheirownbusinessmodel

almostanywhereintheworld.Theglobalexpansionof

production under the control of TNCs has unleashed

a massive and continuous restructuring of production

processes and work routines marked by precarization,

flexibility,outsourcing,andagencywork,profoundlyaf-

fectinglabormarketsinbothdevelopinganddeveloped

countries.TNCshaveconstructed theirproductionand

sourcing through global value networks with regional

clusters(i.e.,NAFTA,theEU,SouthAmerica,China,In-

dia)thattodaycontrolsome80%ofworldtrade(OECD

et al. 2013: 7). This spreading web of activity enables

TNCstoleverageeconomicdifferencesamonglocalities

anduse the fragmentedandheterogeneousnatureof

country-specificregulationsofemploymenttoarbitrage

laborcostsforgreaterprofits.EventheOECDrecognizes

thatglobalizationhasincreasedthedownwardpressure

onwagesandcurtailedthebargainingpowerofworkers

andtheirunions:

AnotherimportantimpactofglobalisationandGVCs

concerns wages and inequality. Recent OECD work

estimatesthat,whileotherfactorsarethemaindriv-

ers,atleast10%ofthedeclineintheshareoflabour

innationalincomeisduetoglobalisationandinpar-

ticulartothepressuresarisingfromtherelocationof

partsofproduction inGVCsand from import com-

petitionfromcompaniesproducingincountrieswith

lowlabourcosts.Increased(international)competition

notonlyreducesthesizeoftherentsthatemployers

andworkersshare,butalsodecreasesthebargaining

powerofworkers(OECD2013:22).

Environmentalscandalsandcountlesshumanrightsvio-

lationsbyTNCshavebeenwidelyreportedbythemedia

inthe lastdecades,particularly indevelopingcountries

dependentontheexploitationoftheirnaturalresources

andtheirlargelyunskilledlaborforceforeconomicsur-

vival. Precarious employment relations and child labor

aboundinsuchsettings,regardlessofwhetherthework

is subject to some formof regulationor contract (for-

mal)ornot(informal).Suchdisregardforhumanrights

isnot,however,limitedtosuchcases.Indeed,precarious

employment is rapidly becoming the »standard« work

relationshipthroughouttheworld,fuellingsocialdisrup-

tion,deprivation,andpoverty.

These kinds of situations have made evident that the

growingeconomicandpoliticalpowerofTNCsisrarely

accompanied by growth in entrepreneurial responsibil-

ity.A»good«productionlocationisstilldefinedbylow

wages, precarious legal protection for workers, weak

environmental protection, low (or no) corporate taxes,

andweak(ornon-existent)tradeunionrepresentation.

Humanandworkers’rightsaswellassocialresponsibil-

ityaresubordinatedtothecorporateobjectivesofprofit

maximization.Voluntaryagreementsthatextollbusiness

ethicsandcorporatesocialresponsibilityseemappealing

inwriting,butinfact,asmoststudieshaveshown,have

hadverylimitedeffectonthesedevelopments,primar-

ilybecausetheyarevoluntarydeclarationsbycorporate

management and are not legally binding. Unions and

othercivilsocietyorganizationshaveconstantlyendeav-

oredtomonitorTNCsandhavebeeneffective in their

campaignstoexposelaborandhumanrightsviolations.

Beyond the scandalizing of individual cases, unions in

particular havenegotiated framework agreements and

beguntobuildcross-countrynetworks in transnational

companies. They often, however, find themselves in a

DavidversusGoliathbattlewhenitcomestoconvincing

policymakersoftheneedforandimportanceofeffec-

tivesanctionsagainstfinanciallypowerfulmultinational

players.

4.1Statements,Codes,Principles,Norms,andRegulatoryInitiatives

Incontrasttotheareasofinvestmentandtaxes,inwhich

TNCsandtheirallieshaveconstructedaprotectiveinstitu-

tionalenvironmentagainstpublicanddemocraticcontrol

oftheiractivities,thefieldofemploymentandlaborrela-

15


tionsisdefinedmorebyapatchworkof»self-regulatory

initiatives,« suchas corporate codesof conduct, social

labeling,certificationschemes,andsocialauditing (ILO

2001). In spite of such activities, there remains a glar-

ingabsenceofacomprehensive,coherent,andbinding

regulatory framework. Private interest governance has

risentofillthegapopenedbyliberalizationintheglo-

balizing economy insteadof supplementing an institu-

tionalframeworkofgovernmentallegalstandards.Often

it serves to protect hegemonic interests anddominant

positions,andbecauseofthenon-governmentalstatus

ofthepromulgatorsandparticipantsandagenerallack

of recourse to judicial remedy, thecharacterofprivate

interestgovernanceisvoluntary.Withoutsubstantialin-

putandcontrolbyunions,civilsocietyorganizations,and

politicalforces,corporatesocialresponsibility(CSR)easily

degeneratesintonothingmorethancosmeticmeasures.

In the field of employment relations, this voluntarism

posesanenormouschallengeinregardtotheimplemen-

tation of internationally recognized labor standards in

theinterestofdecentworkingconditions.Asguidelines,

thesecodesusuallycontainnoformalorspecialproce-

duresforimplementation;instead,thereisanunderlying

assumptionthattheywillbeintegratedintostandardcor-

porateoperationsandthatexistingmeasureswillensure

thatallresponsiblecorporatesiteswillcomplywiththe

policiessetout inthecodebycentralmanagement. In

theend,toachievecompliance,mostcodesincorporate

proceduresforinternalorexternalmonitoring,thelatter

beingmorecommonamongcorporations interested in

(orpressuredinto)espousingtransparency(OECD2001).

Tobesure,theILO’scorelaborstandardshaveovertime

gainedincreasingrecognitionasacommonplatformof

laborstandards.17Theyarereferenced,atleastingeneral

terms,inallofthemostwidespreadinitiativesandagree-

mentsaddressingTNCpoliciesintheareaofemployment

andlaborrelations.Forexample,theyarereferencedin

the highly popular UN-sponsored Global Compact, a

membership-basedcorporatesocial responsibility initia-

tiveforbusinessesthatexpressacommitmenttotenuni-

versallyacceptedprinciplesintheareasofhumanrights,

17.ThefourcorelaborstandardsarepartoftheILO’s1998DeclarationonFundamentalPrinciplesandRightsatWorkandembodytheprinciplesonfundamentalrightsexpressedineightILOconventions:freedomofas-sociationandtherighttocollectivebargaining(ILOConventions87and98),eliminationofallformsofforcedlabor(ILO29and105),abolitionofchildlabor(ILO138and182),andtheeliminationofdiscriminationinre-specttoemploymentandoccupation(ILO100and111).Seehttp://www.ilo.org/declaration/thedeclaration/textdeclaration/lang--en/index.htm.

labor, environment, and anti-corruption.18 The Global

Compacthasmore than12,000corporateparticipants

andotherstakeholders frommorethan145countries,

making it the largest voluntary corporate responsibility

initiative intheworld.There is,however,noindepend-

ent monitoring or enforcement of member adherence

to the principles. The only obligation for participating

companiesisthesubmissionofanannualself-compiled

communicationonprogress(COP).Noonereviewsthe

contentofthereport,andthereisnoprocedureforcom-

plaints.Theonlypenaltyfornotreportingfortwoyears

inarowistobedelisted,eventhoughthereisasetof

integritymeasures,includingaprocedurefordialoguein

thecaseofallegationsofseriousviolationsoftheGlobal

Compact’soverallaimsandprinciples.

Another initiative toward regulating multinational cor-

porations is the ILO Tripartite Declaration of Principles

concerningMultinationalEnterprisesandSocialPolicy.19

This is certainly the most comprehensive document in

theareaoflaborprinciples,butwhileithastheauthority

ofbeingtheoutcomeoftripartitenegotiations—among

governments, employers, and trade unions—the dec-

laration’s main shortcoming is that it is not a binding

instrument and contains no enforcement mechanism,

although it is universally applicable. Its interpretation

mechanismhasachievedadegreeof functionality,but

onlywhencaseshavebeenreferredtotheILOCommit-

teeonFreedomofAssociation(CFA)forreview.TheCFA

hasdealtwitharangeofcasesthat involveTNCsover

theyears,withseveralofthemhavingresultedineither

legislativechangesorbetterenforcement.

Another,morerecentlydevelopedinstrumentdirectedat

establishingprinciplesforTNCoperationsistheUNGuid-

ingPrinciplesonBusinessandHumanRightsadoptedin

2011.20Aftermany yearsofdebate, theprinciplesbe-

cameUNpolicyforoperationalizingtheProtect,Respect

andRemedyFrameworkforbusinessandhumanrights

thatwasadoptedin2008.Theframeworkisbasedon

threetenets:thedutyofthestatetoprotectagainsthu-

manrightsabusesbythirdparties (includingbusiness),

thecorporate(business)responsibilitytorespecthuman

rights, and theneed formoreeffectiveaccess to rem-

18.Seehttp://unglobalcompact.org/.

19.http://www.ilo.org/wcmsp5/groups/public/---ed_emp/---emp_ent/---multi/documents/publication/wcms_094386.pdf(2014.12.06).

20.Seehttp://www.ohchr.org/Documents/Publications/GuidingPrinciplesBusinessHR_EN.pdf.

http://www.ilo.org/wcmsp5/groups/public/---ed_emp/---emp_ent/---multi/documents/publication/wcms_094386.pdfhttp://www.ilo.org/wcmsp5/groups/public/---ed_emp/---emp_ent/---multi/documents/publication/wcms_094386.pdf

16


edies, both within business as well as in the realm of

politics.

An important concept to be promoted by theguiding

principlesisduediligence,whichispresentedasanon-

goingprocessundertakenbyabusinesstoidentify,pre-

vent,mitigate,andaccountforhowitaddressesactual

andpotentialadversehumanrightsimpactsinitsopera-

tions.Duediligenceappliestobothlegalobligationsand

voluntaryprocesses.Itsapplicationisseenasameansof

promoting thenotion that companies need to acquire

informationaboutthehumanrightsconsequencesofa

decisionbeforemakingsaiddecision.

Asthisisarelativelynewinstrumentitmightbetooearly

toassessitsfullimpactandrelevance.However,because

itlacksanyenforcementoracomplaintsmechanismof

itsown, itspotential lies in its incorporation intoother

instruments, suchasupdatedOECDguidelines,and in

itscomplementaritytotheILOcorelaborstandardsand

othernormsandguidelines.Atthesametime,thereis

legitimateconcern that theprinciples, inparticular the

conceptofduediligence,willbecapturedbyapervasive

consultancybusinessadvisingTNCson interpretingthe

provisionsandincorporatingthemintotheirpublicstate-

mentsoncorporatesocialresponsibility.

In contrast to the codes with single TNC jurisdiction,

multi-stakeholder initiatives have gained some traction

inupholding labor standards, as theyhaveagenerally

broadermandateandincludeabroaderrangeofparties.

Asthenameimplies,theyconsistofrepresentativesfrom

different constituencies. Corporations and civil society

organizationsarealwaysinvolved,whereastradeunions

have limited their involvementgenerally for reasonsof

ineffectiveness.Insomecases,governmentagenciesmay

beparticipants,inwhichcasetheymaybecalledpublic-

privatepartnerships.Whatevertheirorganizationalform,

theirmandateisusuallydefinedintermsofmonitoring

orauditinglaborconditions.

ManyofthesetypesofschemeswereinitiatedbyNGOs

asmodels forparticular industryorproduct standards.

Insomecases,suchaswiththeEthicalTradingInitiative

(ETI)ortheForestStewardshipCouncil,membershipwas

opentocompaniesaswellasNGOsand laborunions.

Theearliestinstancesofthistypeofvoluntaryregulation

appeared in theapparel industry, the firstmostwidely

known organization being the Fair Labor Association

(FLA).TheFLAstemmedfromnegotiations initiatedby

USpresidentClintonin1996inthewakeofreportsof

childlaborintheindustry.Becauseitspolicyistowork

withthecompaniesthatfundittoimprovetheirinternal

monitoringsystems, theFLAhasbeenwidelycriticized

for lacking autonomy. Original participants, including

tradeunions and churchgroups,withdrewearlyon in

favorofsupportingsuchorganizationsastheWorkers’

Rights Consortium and the Clean Clothes Campaign,

bothofwhichare industry independentandareallied

withtradeunions(Fichter2013:396).

Another instrument that seems to be growing in im-

portanceistheOECD’sGuidelinesforMultinationalEn-

terprises,originallyadopted in1976andmost recently

revised in2011.Theyapply toallTNCsheadquartered

in the countries that have signed the guidelines. The

governmentsof these countries are required to setup

nationalcontactpoints(NCPs)toreceiveandtoassistin

resolvingcomplaintsofallegedviolationsoftheguide-

lines.Mostcomplaintsconcernviolationsoftherightto

freedom of association and collective bargaining, but

complaints have also been filed related to precarious

work,disclosureofinformation,forcedlabor,discrimina-

tion,healthandsafety,theenvironment,andcorruption.

Thelatestupdateoftheguidelineshasresultedinanum-

berofsignificantimprovements,with,forexample,the

inclusionofanewhumanrightschapter;theadoption

ofageneralrecommendationtoconductduediligence

toavoidandaddressadverseimpacts;anapplicationof

theguidelinestosupplychainsandotherbusinessrela-

tionships;abroadeningofthescopeoftheemployment

chaptertoincludeworkersinindirectemploymentrela-

tionshipsaswellasemployees;andastrengtheningof

thegovernment-backedcomplaintsmechanism.Still,the

effectivenessoftheguidelinesincurtailingviolationsof

laborstandardshasbeenextremelylimited.Theremedia-

tionprocesscanbequitedrawn-out;thereisnorequire-

mentfortheaccusedTNCtorecognizethecomplaint;

andgovernmentsmayallocateresourcesandrecognition

totheirownNCPsastheyseefit,whichcangreatlyaffect

themannerinwhichaparticularcontactpointhandles

acomplaint.

Globalframeworkagreements(GFAs)areaninstrument

developed by unions to negotiate the recognition and

application of international labor standards (based on

ILO conventions) and provide procedures for handling

17


violationsofsuchstandardsatTNCs.Incontrasttothe

usuallyunilateralandvoluntarynatureofinitiativesbased

on corporate social responsibility, GFAs are bilateral

agreements between TNCs and global union federa-

tions(GUFs).Asimpliedbythetermframework,aGFA

providesaforumforsocialdialoguebetweenlaborand

capital. It also sets minimum labor standards, defines

basicprinciplesof labor relations,andopensspace for

buildingunionrepresentation.Inmostcases,thisspace,

orarenaof labor relations,extendsbeyond the formal

organizationalboundariesofthesignatoryTNCtocover

alltheoperationsofaTNCandpartsofitsglobalvalue

network.Bytheendof2013,morethan100agreements

hadbeensigned,with92ofthemfunctional.21Todate,

negotiatingandsigningofGFAsisstilllargelyaEuropean

phenomenon,withonly17beingconcludedwithnon-

EuropeanTNCs.

Whiletheimportanceofthisgrowthinnumbersshould

notbeunderestimated,puttingtheagreedmeasuresinto

practice—thatis,implementationofexistingGFAs—isar-

guablykeytotheirsuccessastransnationaltradeunion

policy. Recently completed research shows that imple-

mentationhasbeen limitedandhasproven shortcom-

ings, regardless of the particular national environment

(Fichteretal.2012).Thefewcasesofsuccessfulimple-

mentationhavesofarbeenmoretheresultofmobilized

unionpressureresultinginpositivecorporateresponses,

ratherthanGFAs’clearlydefinedpoliciesandprocedures.

Unioncapacitybuildingisanecessaryfoundationforen-

suringthatthenegotiationandimplementationofGFAs

willbeeffective,especiallywhenconfrontedbymanage-

mentresistance.

IfGFAsaretogainmore legitimacyandrecognitionas

a means of establishing dialogue, attaining minimum

standards,andfosteringlaborrelations,thenthereisa

needtoincorporateamoresystematicandrobustmulti-

organizational approach into the overall GFA process

of negotiation and implementation. The widespread

incidence of non-implementation and cases of partial

or subsidiary-specific implementation provide evidence

that implementation needs to be treated as part of a

multi-organizationalpracticedevelopmentprocessstart-

ingwiththeinitiativetonegotiateaGFA(Fichter,etal.

2014).

21.The non-functional agreements are those GFAs in TNCs that havemerged,beenacquired,orhavefolded.

4.2Alternatives

Although the concerted efforts of trade unions and

civilsocietyorganizationstoholdTNCsaccountablefor

theirtreatmentofhumanandlaborrightsintheirbusi-

nessoperationshave led to substantialprogress, there

remains room for improvement in their record. In the

absenceofafunctionalandcomprehensivebindinglegal

instrument,amorestrategicuseofthevarietyofexisting

instruments couldproducebetter results. Forexample,

GFAshaveproventobeeffectivewhentheyareactively

backedandpromotedbytradeunionsintheworkplace.

Signedagreementscreatethepreconditionsforexercis-

ingtherightsrecognizedintheagreement,butwithout

unionandworkervoices,TNCstendtobecontentwith

advocatingtheirCSRcommitments.Unions,inparticular

theglobalunions,haverespondedbymakingconcerted

effortstobuildtransnationalunionnetworksbothwithin

singleTNCsandstretchingacrosstheirnetworksofsup-

pliers,subcontractors,andotherbusinesspartners.

Despite theadvancesmadebyunionsandcivil society

organizationstostrengthentheirtransnationalactivities,

progresshasbeenlimited.Thattheonlymeanscurrently

available tocurtail corporateabusesare societalbased

anddependentonmobilizingcollectivestrengthtocon-

testcorporatepowerhighlightsthepressingneedfora

bindingorenforceable instrument thatholdsTNCsac-

countablefor laborrightsandhumanrightsviolations.

To be sure, a strengthening of state labor legislation,

through more comprehensive coverage and improved

implementation, would certainly help curtail abuses

of human and labor rights. A global approach is also

needed,however.Inthisregard,itisimportanttonote

thatinJune2014,theUNHumanRightsCouncilpassed

acontroversial resolution toestablishaworkinggroup

»toprepareatreatyimposinginternationalhumanrights

legal obligations on transnational corporations.«22 Po-

tentially,thisprocess,independentofitsoutcome,could

serve as a referencepoint for constructinga canonof

binding instrumentsembedded in internationalhuman

rightslawtoregulatetheactivitiesoftransnationalcor-

porationsandotherbusinessenterprises.

22.Seehttp://www.ijrcenter.org/2014/07/15/in-controversial-landmark-resolution-human-rights-council-takes-first-step-toward-treaty-on-trans-national-corporations-human-rights-obligations/. The resolution’s man-date is regarded as controversial by both council member states andinterestedcivilsocietyorganizations,includingHumanRightsWatchandEarthjustice.

18



Noneoftheinstrumentsandorganizationalapproaches

presented above represents a fully satisfactory means

of regulating TNCs in terms of employment and labor

relations. They all have shortcomings, in particular in

regard to their implementation. These shortcomings

needtobeaddressedand,forexample, inthecaseof

GFAs, strategies developed for improving their appli-

cability and usage. Equally important, however, would

be considerations for the more comprehensive use of

these instruments through linkage.Until today, unions

and labor-oriented civil society organizations have sel-

dom developed and practiced an integrated approach

combining the use of these different instruments. For

example,thereislanguage—i.e.,duediligenceintheUN

GuidingPrinciplesonBusinessandHumanRights—that

couldbeusedtostrengthentheeffectivenessofGFAs.

Additionally, the importance of functional NCPs under

theOECDGuidelinesforMultinationalEnterprisesisan

issuetobeconsidered.TotheextentthatTNCsarecon-

cernedwiththeirpublicreputation,therewouldseemto

beroomforunionsandothercivilsocietyorganizations

tobemoreexactingintheirdemandsthatTNCsadhere

totheirownclaimsofsustainabilitygoalsandconcern

forhumanrights.

In this field, enormousprogresswould result from the

recognition of labor rights as human rights and their

delineationinalegallybindinginternationaltreaty.This

shouldberecognizedasalong-termgoaltowardwhich

theprocessofitsrealizationisequallyimportant.Push-

ingforwardonspreadingsuch»private«regulationsas

GFAsormulti-stakeholderinitiativesinacomplementary

fashioncancontributetoabetterunderstandingandrec-

ognitionofinternationallaborstandardsandtheneedto

combathumanrightsviolations.Furthermore,theroleof

theILOshouldbeemphasizedinregardtomaintaininga

coherentunderstandingofinternationallaborstandards

asembodiedinILOconventionsandrecommendations,

aswellasintheILODeclarationofFundamentalPrinci-

plesandRightsatWorkandtheTripartiteDeclarationof

PrinciplesconcerningMultinationalEnterprisesandSocial

Policy.Asthenumberofreferencestointernationallabor

standards(inheterogeneousforms)increasesinbilateral

and regional tradeagreements, it is important tohave

theexpertiseoftheILOathand.

Amoreimmediateactivitythatcouldbringshort-aswell

as long-term improvements in labor andhuman rights

would be to invest resources in building transnational

unionnetworks.Eventoday,suchnetworksareproving

tobeeffectiveinstrengtheningunioninputandworker

voicesinregardtoTNCpolicies.Informationexchanges,

strategy consultations, and even common activities in

supportofprotectinglaborrightsarepracticalexamples

ofhowitispossibletochallengetheexistingasymmetry

ofpowerbetweenTNCsandemployees.

Unionnetworks canbeaugmentedbydevelopingalli-

ancesamongunionsandothercivilsocietyorganizations

totacklelaborrightsviolationsinglobalvaluenetworks.

GoodexamplesofsuchalliancesaretheCleanClothes

CampaignandtheWorkers’RightsConsortium,bothof

whichareNGOsthathaveunioninvolvementandhave

workedcloselywithunionsformanyyearstostoplabor

rightsviolations.

Aspartof suchorganizingefforts,a focusofactivities

canbedirectedtowardscandalizinggapsbetweenTNC

claimsofgoodcitizenshipandpoorpractices.Inparticu-

lar,therealityofCSRproclamationsshouldbesubjected

totesting.

Strategiesandconceptsshouldbedevelopedforchang-

ing the»rulesof thegame«ofglobal governance.At

present,TNCsoperatelargelyonthebasisoftheirown

corporate rules. Building a broader social movement

drivenbyalliancesofunionsandcivilsocietyorganiza-

tionswouldbringotherintereststotheforeandpromote

interestmediationanda(re)negotiationofpositionsand

interaction. Indeed,buildinganeffectiveandpowerful

coalition of interest representation in this sense opens

theopportunitytoachieveaconstructiveandproductive

dialoguewithatleastsomeTNCs.

5.Conclusion,Questions,andIdeas

From the presentation of the democratic deficits and

themassivepowerofTNCs in theareasof investment

regimes,taxationsystems,andlaborinthecontextofhu-

manrights,itseemsself-evidentthatthereisaneednot

onlytodevelopspecificresponsesineachareabutalso

tomovebeyondthelevelofaddressingeachindividually

to finding commonground for amore comprehensive

approach.Thepoweroftransnationalcorporationsisthe

19


baselineforredressingtheimbalanceofpowerbetween

corporations and society and counteracting corporate

capture.Tobesure,specialistunderstandingineachof

thesefieldsisimportant,butnottotheexclusionofthat

particular field’s relevance to and impact on the other

fields.Foreigninvestmentdecisionsarenotmadewithout

considerationsoflaborcosts,skilllevels,oremployment

regulations,noraretheymadewithoutconsiderationof

taxlawsandcapitalcontrols.Evenmore,treatiesprotect-

ingexpansiveforeign investor»rights«enableTNCsto

directlychallengestates’laborlaws,financialtransaction

taxes,andcapitalcontrols.Taxavoidanceisnotonlyan

outcome, but more relevantly a key element of finan-

cialization. Inall threeareas,TNCshaveamassedhuge

wealththatisthenusedtoinfluenceandexertpowerto

bothchangetherules intheirfavorandstymiethe in-

troductionofnewrulesgoverningtheirglobalbehavior.

Assuch,thenascentstatusofstrategiccorporateresearch

in regard tocampaignstrategies tobuildunionpower

and forge broader social movement alliances needs a

broader horizon that includes investment and taxation

andpossiblyotherareasaswell.Addressingthepowerof

TNCsandtheimbalanceofpowerthattheyhavecreated

totheiradvantageneedstobecomprehensive,because

theimbalanceinitselfcreatesmajorbarrierstochangein

allthreeareasunderdiscussion.Suchissuesascorporate

governanceandaccountability,corporateprotectionsin

tradeand investment treaties, corporatemediacontrol

and influence, and corporate leverage in the political

processarejustsomeoftheissuesontheagenda.

Followingfromthisisthegeneralproblemoftheinability

of national governments to adequately regulate TNCs

acrossbordersandtheneedforademocraticandeffec-

tive global infrastructure of regulatory institutions and

strong inputs from tradeunionsandother civil society

organizations.Atpresent,bindingglobalrulesexistonly

whereTNCswantandfavorthem(i.e.,investor-statedis-

puteprocedures),butnotwhereenvironmental,labor,or

taxissueswouldbedetrimentaltotheirimmediateprofit

interests.Thisisthelogicfuelingtheracetothebottom

inregardtoinvestment,taxes,andlabor.

Economic globalization—driven by financialization, de-

regulation, and liberalization—hasenormouslybenefit-

tedTNCs,enablingthemtoamassunprecedent