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July 13, 2013

Essay on Multilateral Investments

During the last several years, the developed countries have been stepping up their pressure to install a multilateral investment agreement that prevents countries from controlling TNC investment activities, and possibly the activities of portfolio investors. The first major attempt along this line was the proposal to introduce a Multilateral Investment Agreement (MIA) through the OECD in the late 1990s. When this failed, the issue was momentarily shelved, but it has come back with a vengeance as one of the so-called Singapore issues of the WTO. There is now a move to initiate the negotiation for a multilateral investment agreement at the forthcoming Cancun meeting of the WTO in September 2003.
The developed countries argue that, in the same way all of them had used free trade policy in order to become rich, they all have benefited from policies welcoming foreign investors and therefore that the developing countries should do the same. In their view, those developing countries that are objecting to free trade agreements and liberal investment agreements are making a futile attempt to go against the current of history – how do they think they can succeed in economic development without the tried and tested means of free trade and free investment?
In this paper, I will show that this view is fundamentally misguided, by examining the historical experiences of a number of today's developed countries the USA, the UK, France, Germany, Finland, Ireland, Japan, Korea, and Taiwan, and showing that in general they have not used liberal policies towards foreign investment before they became highly developed. Then I will draw lessons from these historical experiences for today's developing countries' foreign investment regulation and for the discussion on a potential WTO agreement on investment.
2. The USA
From its early days of economic development to the First World War, the USA was the world's largest importer of foreign capital. The eminent business historian Mira Wilkins plainly states that during the 1875-1914 period, the USA was "the greatest debtor nation in history" despite its rise as one of the major lender countries in the international capital market at the end of this period (Wilkins, 1989, p. 144). Given the country's position as a net importer of capital, there was naturally a lot of concern with foreign investment. While many Americans accepted the necessity of foreign investment and some sought it out enthusiastically, there was also a widespread concern with "absentee management" (Wilkins, 1989, p. 563), and, further, foreign domination of the American economy.
The fear of foreign investment was not confined to the "radicals". For example, the Bankers' Magazine of New York remarked in 1884: "It will be a happy day for us when not a single good American security is owned abroad and when the United States shall cease to be an exploiting ground for European bankers and money lenders. The tribute paid to foreigners is … odious … We have outgrown the necessity of submitting to the humiliation of going to London, Paris or Frankfort [sic] for capital has become amply abundant for all home demands" (Bankers' Magazine, no. 38, January, 1884, cited in Wilkins, 1989, p. 565). According to the same magazine, the great majority of Americans believed it was "a misfortune to have its [the country's] public, corporate, and private securities abroad" (no. 33, April, 1879, cited in Wilkins, p. 915, note 67).
Even Andrew Jackson (the seventh President of the USA, 1829-37), a well-known advocate of small government and therefore something of a hero among American free-marketeers today, amply displayed anti-foreign feelings. He famously vetoed the renewal of the federal government charter for the country's second quasi-central bank, the (second) Bank of the USA, largely on the ground that "many of its stockholders were foreigners" (Wilkins, pp. 61-2, p. 84; Garraty & Carnes, 2000, pp. 255-8). When he exercised his veto in 1832, he said: "should the stock of the bank principally pass into the hands of the subjects of a foreign country, and we should unfortunately become involved in a war with that country, what would be our condition? …. Controlling our currency, receiving our public moneys, and holding thousands of our citizens in dependence, it would be far more formidable and dangerous than the naval and military power of the enemy. If we must have a bank … it should be purely American." (as cited in Wilkins, 1989, p. 84).
Others would go even further. On the eve of the de-chartering of the Second Bank of the USA (henceforth SBUSA), the Jackson government moved federal government deposits to other banks. One of these banks, the Manhattan Bank, was foreign-owned but, not being a federal-chartered bank like the SBUSA, it did not ban foreign shareholders from voting (which was the case with federally-chartered banks – see below). Therefore, Niles' Weekly Register, one of the leading magazines of the time, found it scandalous that "IN THIS BANK THE FOREIGN STOCKHOLDERS VOTE [capitals original]!" (no. 45, 16 Nov, 1833, cited in Wilkins, 1989, p. 84). Another article that appeared two years later in this magazine (no. 48., 2 May, 1835) neatly sums up the dominant American feeling at the time – "We have no horror of FOREIGN CAPITAL—if subjected to American management." (cited in Wilkins, 1989, p. 85, italics and capitals original).
In order to ensure that foreign investment does not lead to loss of national control in the key sectors of the economy, a large number of federal and state legislation were enacted in the USA since its Independence until the mid-20th century, when it became the world's top economic nation. And as the main sectors that received foreign investments during this period were in finance, shipping, and natural resource extraction (agriculture, mining, logging), the legislation were concentrated in them.
2.1 Federal legislations
(a) Navigation
One of the first acts of the new Congress upon Independence as an imposition in 1791 of differential tonnage duties between national and foreign ships (Wilkins, 1989, p. 44). Similarly, a navigation monopoly for US ships for coastwise trade imposed in 1817 by the Congress (Wilkins, 1989, p. 83). This continued until WWI (Wilkins, 1989, p. 583).
(b) Finance
In the financial sector, legislative provisions were made in the charter for the country's first quasi-central bank, the first Bank of the USA (henceforth FBUSA) in 1791 to avoid foreign domination. Only resident shareholders could vote and only American citizens could become a director. And thanks to these provisions, the Bank could not be controlled by foreigners, who owned 62% of the shares by 1803 and 70% by 1811. Despite this, when its charter was up for renewal in 1811, the Congress did not re-charter the Bank "in large part owing to fears of foreign influence" (Wilkins, 1989, pp. 38-9, p. 61; the quote is from p. 61). A similar provision against voting by foreign shareholders was made for the SBUSA, when it was given the federal charter in 1816 (Wilkins, 1989, p. 61).
In addition, the 1864 National Bank Act also required that the directors of national (as opposed to state) banks had to be Americans (Wilkins, 1989, p. 455) – this lasted even after the introduction of the Federal Reverse System in 1913 (Wilkins, 1989, p. 583). This meant that "foreign individuals and foreign financial institutions could buy shares in U.S. national banks if they were prepared to have American citizens as their representatives on the board of directors" And therefore "[t]hat they could not directly control the banks served as a deterrent to investment" (Wilkins, 1989, p.l 583).
(c) Land
From the early days of independence, many state governments barred or restricted non-resident foreign investment in land (Wilkins, 1989, p. 45). However, a particularly strong feelings against foreign land ownership developed, following the frenzy of land speculation by foreigners in the frontier areas in the 1880s. In 1885, the New York Times editorialised against "an evil of considerable magnitude—the acquisition of vast tracts of land in the Territories by English noblemen" (NYT, 24, Jan., 1885).
Reflecting such feelings, the federal Alien Property Act (1887) and 12 state laws were enacted during 1885-95 with a view to control, or sometime even altogether ban, foreign investment in land (Wilkins, 1989, p. 235). An 1885 resolution passed by the New Hampshire legislature read: "American soil is for Americans, and should be exclusively owned and controlled by American citizens" (Wilkins, 1989, p. 569). The 1887 federal Alien Property Act prohibited the ownership of land by aliens or by companies more than 20% owned by aliens in the territories (as opposed to the states), where land speculation was particularly rampant (Wilkins, 1989, p. 241). However, it must be noted that due to the lack of disclosure rule on ownership, it was practically not possible to check upon the identities of all the corporate owners and therefore the law was not totally effective (Wilkins, 1989, p. 582).
(d) Natural Resources
There was less hostility towards foreign investment in mining than towards that in land, but still considerable ill-feelings existed (Wilkins, 1989, pp. 572-3). Federal mining laws in 1866, 1870, and 1872 restricted mining rights to US citizens and companies incorporated in the USA. In 1878, a timber law was enacted, permitting only US residents to log on public land (Wilkins, 1989, p. 581). Similarly to the Alien Property Act, these laws were not totally effectual against foreign corporate investment, due to the difficulty of checking company ownership (p. 129). In 1897, the Alien Property Act was revised to exempt mining lands.
(e) Manufacturing
Restrictions on foreign investment in manufacturing were relatively rare, as such investment was not very important until the late 19th century, by which time the USA managed to build up a robust position in many sectors of manufacturing behind the world's highest tariff barrier. However, there were still concerns about the behaviour of TNCs in manufacturing, especially transfer pricing. For example, a US government investigation in the wake of the First World War expressed grave concerns that the German TNCs were avoiding income tax payment by understating their net earnings by charging excessively for technology licenses granted to their American subsidiaries (Wilkins, 1989, p. 171). Interesting in relation to FDI in manufacturing was the 1885 contract labour law, which prohibited the import of foreign workers. This applied also to national companies, but it obviously affected foreign firms more, especially in relation to the import of skilled workers (Wilkins, 1989, pp. 582-3). Many TNCs did not like the law because it restricted their ability to bring in skilled workers from their headquarters.
2.2. State Legislations
Some of the state laws were even more hostile to foreign investment than the federal laws (Wilkins, 1989, p. 579). In addition to the state laws banning or restricting non-resident foreigners' investment in land that had existed from the early days of independence, 12 state laws were enacted during 1885-95 with a view to control, or sometime even altogether ban, foreign investment in land (Wilkins, 1989, p. 235). In addition, there were number of state laws that taxed foreign companies more heavily than the American ones. There were also a notorious Indiana law in 1887 withdrawing court protection from foreign firms (p. 579). The New York state government took a particularly hostile attitude towards foreign investment in finance, an area where it was rapidly developing a world-class position (a case of infant industry protection, one may say). A New York law in 1886 required foreign insurance companies to have 2.5-times minimum paid-up capital of American companies (p. 580), while another law required that all certified public accountants (CPAs) to be American (p. 580). The New York state also instituted a law in the 1880s that banned foreign banks from engaging in "banking business" (such as taking deposits and discounting notes or Bills). The 1914 banking law banned the establishment of foreign bank branches (Wilkins, 1989, p. 456). These laws proved very burdensome on foreign banks. For example, the London City and Midland Bank (the then world's third largest bank, measured by deposits) could not open a New York branch, when it had 867 branches worldwide and 45 correspondent banks in the USA alone (Wilkins, 1989, p. 456).
On the whole, federal government condoned anti-foreign state laws. Wilkins (1989) writes: "The State Department and Congress did give an implicit green light to anti-foreign state government laws. Neither was responsive to intermittent diplomatic inquiries from London, requesting the federal government to muzzle state legislators. The Secretary of State John Hay replied (in 1899) in a very standard manner to one such request that was related to discriminatory taxes against foreign fire insurers: ‘Legislation such as that enacted by the State of Iowa is beyond the control of the executive branch of the General Government'" (p. 584).
2.3. Summing-up
To sum up, in contrast to its strong support for foreign investment liberalisation today, when it was a capital-importing country, the USA had all kinds of provision to ensure that foreigners invest in the country but do not control its economy. For example, the US federal government had restrictions on foreigners' ownership in agricultural land, mining, and logging. It discriminated foreign firms in banking and insurance, while prohibiting foreign investment in coastal shipping. It demanded that all directors of national banks have to be American citizens, while depriving foreign shareholders of voting rights in the case of federally-chartered banks. It also prohibited the employment foreign workers, thus implicitly disadvantaging foreign investors that wanted to import skilled labour from their home countries.
At the state level, there were even more restrictions. In addition to restrictions on land ownership, many states taxed foreign companies more heavily and some even refused them legal protection. Many state legislation in the financial sector were even more discriminatory. Some states imposed more strict capital base requirements on foreign financial institutions, and some even totally banned entry into certain financial industries (e.g., New York state laws banning foreign bank entry). The federal government condoned such laws and refused to take action against state governments even when there were pressures from foreign investors and governments to do so.


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