New World vs. Old World Trade Policies

-- The flow of foreign direct investment (FDI) into developing countries (including China) grew more than 10-fold in the past 15 or 16 years. It reached $379,070,000,000 in 2006.

-- The services sector – banks, communication, education, hotels, restaurants, and public utilities, for example – now outpaces manufacturing in attracting FDI. In 2005 the services sector accounted for about three-fifths (61 percent) of global FDI stock (up from 49 percent in 1990).

-- Although the number of multinational corporations with headquarters in developing countries is increasing, they still are dwarfed by those based in industrialized economies. The total foreign assets of the top multinationals based in developing economies, for example, in 2005 amounted to the total foreign assets of a single U.S. multinational, General Electric, the largest multinational in the world.

-- Foreign affiliates of the 78,000 multinational corporations based in the United States, Europe, and Japan have tripled their workforce. In 2006 the number of people on their payrolls stood at 73,000,000 (not counting people hired by contractors and subcontractors), up from 25,000,000 in 1990.

Those are a few of the fascinating statistics in Development and Globalization: Facts and Figures, just issued by the United Nations Conference on Trade and Development (UNCTAD). They illustrate the transformations the world has undergone since 1990.

What implications do these and other transformations have for world trade and investment policies? The question is seldom addressed. But there are some exceptions.


Awareness is growing that at least the investment chapter of the typical trade agreement needs revision. UNCTAD’s 2007 Trade and Development Report, for example, criticized most bilateral “North-South” free trade agreements for restricting the options that poor countries have for adopting FDI policies suitable for their own circumstances.

On October 1-2, over 30 negotiators representing more than 25 countries assembled in Singapore for the 1st Annual Forum of Developing Country Negotiators. There they discussed (as a forum report put it) “their common challenge: finding the appropriate balance between the need to attract more foreign direct investment and the need to serve a wide range of public policy objectives, including economic development.”

That same challenge facing developing countries is analyzed in a report expected to be approved by the June meeting of the Human Rights Council. The report; written by Professor John Ruggie of Harvard, devotes seven paragraphs to the “adverse effects” of the current one-sided policy of protecting foreign investors and investments. These protections, Ruggie writes, have been expanded “with little regard to States’ duties to protect to protect [human rights], skewing the balance between the two [the State and the foreign investor].”

“The State Duty to Protect” human rights is a major theme of the Ruggie report, titled Protect, Respect and Remedy: a Framework for Business and Human Rights. Pope Benedict XVI stressed the same theme, mostly using the same terms, in his address to the UN General Assembly on April 18.

When will U.S. policymakers listen to these voices? Until they do, expect the backlash against globalization to continue, or even to intensify. See previous postings this month.


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The Backlash Against Globalization

“In general, do you think that free trade agreements like NAFTA, and the policies of the World Trade Organization, have been a good thing or a bad thing for the United States?”

“Bad thing” was the answer of 48 percent of Americans in a poll conducted at the end of April. “Good thing” was the answer of 35 percent. In the 10 years since that question was first asked, support for global trade policies has never been weaker.

A bipartisan negative attitude on trade seems to be emerging. Half (50 percent) of Democrats rated current trade policy as bad in the April poll. So did 40 percent of Republicans – and 52 per cent of Independents.

These results, released May 1 by the Pew Research Center, are more bad news for and about globalization. It should be another warning to present and future U.S policymakers on trade that the status quo won’t do and that tinkering with it won’t do either.


A column by Robert Skidelsky, a British author, draws a global picture of what is at stake. In “The Moral Vulnerability of Markets,” he writes:

“Today, there seems to be no coherent alternative to capitalism, yet anti-market feelings are alive and well, expressed for example in the moralistic backlash against globalization. Because no social system can survive for long without a moral basis, the issues posed by anti-globalization campaigners are urgent – all the more so in the midst of the current economic crisis.”

Excuse this self-promotion: In an article published in the October 24, 1998, issue of America magazine I wrote: "The cry for global solidarity [for respecting worker rights] sends a powerful message to world policymakers. Failure to heed it risks a perilous backlash: an upsurge in protectionism, exaggerated nationalism, and paranoia about international bureaucracies."


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Populist Ideas from Harvard’s Summers

“Populism,” or pre-election pandering to the ungrounded fears of workers. That’s the dismissive accusation leveled against trade policy reforms proposed by the two Democratic candidates for the U.S. presidency, Senators Clinton and Obama. Now a distinguished American economist has come forward to give their populism a good name.

Lawrence Summers, former U.S. Secretary of the Treasury, does so in a two-part article in the Financial Times, which is not a populist organ. Without mentioning the debate or the debaters, Summers explains why U.S. workers have a legitimate basis to oppose current U.S. trade policy. He urges revising it “to focus on the issues in which the largest number of Americans have the greatest stake.”

As a mainstream economist, Summers expresses his continued support for global economic integration – but not its present form. He emphasizes that economic integration will stagnate unless the workers of the United States and other countries grow convinced that it benefits them, and not just its “business champions.” So he argues strongly for the need to develop “a strategy to promote healthy globalization.”

His strategy has two components:

-- Domestic: “strengthening efforts to reduce inequality and insecurity.”
-- International: “focus on the interests of working people in all countries, in addition to the current emphasis on the priorities of global corporations.”


Summers, 53, now a professor at Harvard, which he headed for five years as president until two years ago, draws on a parallel in American history for the current need to focus international economic diplomacy more on preventing harmful competition between countries:

“There is a reason why progressives in the early part of the 20th century sought to have the federal government take over many kinds of regulatory responsibility. They were concerned that competition for business across states, and their ease of being able to move, would lead to a race to the bottom.

“Financial regulation is only one example of where the mantra of needing to be ‘internationally competitive’ has been invoked too often as a reason to cut back on regulation. There has not been enough serious consideration of the alternative – global cooperation to raise standards.”

Here Summers adds: “While labor standards arguments have at times been invoked as a cover for protectionism, and this must be avoided, it is entirely appropriate that U.S. policymakers seek to ensure that greater global integration does not become an excuse for eroding labor rights.”

In his two-part article (one published on April 28, the other on May 4), Summers acknowledges that two U.S. policymakers detected the present predicament years ago: former U.S. Secretary of Labor Robert Reich and economist Paul Samuelson.

Summers’ ideas add to the doubts that a growing number of economists have about U.S. trade policy. That policy is deeply entrenched, however, and might well continue more or less as is (even by inserting a supposedly improved labor chapter into NAFTA). Hopefully, however, the next occupant of the White House will be wise and strong enough to initiate a broad strategy to promote healthy globalization.



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Multinationals, Human Rights, and UN – III

(Reporting on the Ruggie Report – III)

Can anything concrete come out of the report that Professor John Ruggie prepared for the June session of the UN Human Rights Council? After all, the report offers just a “framework” for business and human rights, not a program of action.

Yet the report is far from a compilation of abstractions. I find that it contains a bundle of specific policy ideas that, if taken seriously by the Council and even only a few major UN members, will improve the protection of individuals, organizations, and weak governments against what Ruggie calls “corporate-related human rights harm.”

Take Ruggie’s incisive criticism of the present foreign investment system. He describes how trade and investment laws have expanded the legal rights of foreign investors without matching responsibilities, and thereby undermined the State’s duty to protect human rights, “skewing the balance between the two.”

This imbalance creates human rights predicaments for both “host States” and “home States.” A major example cited by Ruggie: “host States can find it difficult to strengthen domestic social and environmental standards, including those related to human rights, without fear of foreign investor challenges, which can take place under binding international arbitration” – that is, under a procedure that often favors the investor, a flaw not mentioned by Ruggie.

His report provides enough information on this imbalance to strengthen already existing campaigns to correct it. And the various issues that Ruggie highlights should be instructive to Congress next year when it formulates U.S. trade and investment policy to replace “trade promotion”legislation and other policies conducive to moving jobs offshore. Ruggie’s insights will also be useful in the almost certain renegotiation next year of the 15-year-old North American Free Trade Agreement (NAFTA), which set the pattern for the imbalances written into subsequent U.S. bilateral trade agreements.

Another concrete matter covered in Ruggie’s “framework” concerns the Paris-based Organization for Economic Cooperation and Development (OECD), of which the United States and 39 other industrialized states are members. The OECD Guidelines for Multinational Enterprises are “currently the most widely applicable set of government-endorsed standards related to corporate responsibility and human rights,” as Ruggie points out.

In analyzing the Guidelines, he explains why and how they should be revised to make their human rights provisions more specific, and how their administration needs improvement. The case he makes is sure to assist trade union leaders and others who have long pressed for similar reforms.

So the report does indeed have much potential value on the practical level. Moving from the potential to the actual, of course, will depend on a variety of “actors,” or “stakeholders,” including the institution that commissioned the report, the Human Rights Council.

Ruggie concludes his report with this sentence: “The Human Rights Council can make a singular contribution to closing the governance gaps in business and human rights by supporting the framework, inviting its further elaboration, and fostering its uptake by all relevant social actors.”

Note the term that appears in that sentence and elsewhere in the report – governance gaps. The gaps exist “between the scope and impact of economic forces and actors, and the capacity of societies to manage their adverse consequences….How to narrow and ultimately bridge the gaps in relation to human rights is our fundamental challenge.”

He restates, and reemphasizes, that challenge in his concluding paragraphs: “As has happened throughout history, rapid market expansion has also created governance gaps in numerous policy domains: gaps between the scope of economic activities and actors, and the capacity of political institutions to manage their adverse consequences. The area of business and human rights is one such domain.”

The greatest value of Ruggie’s 28-page report, in my view, is that he contributes much toward an evolving paradigm of business and human rights under globalization. Policymakers need such a conceptual framework to make sustainable progress toward integrating business and human rights in principle and in practice.


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Multinationals, Human Rights, and UN - II

(Reporting on the Ruggie Report – II)

“Unfeasible, unnecessary, and counter-productive.” That’s how the U.S. Council for International Business denounced a 2003 document titled the “Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights,” or Norms. The opposition of the U.S. government, too, was vigorous, so much so that Amnesty International publicly called upon U.S. Secretary of State Condoleezza Rice to put an end to U.S.’s “undermining” the Norms.

The document that provoked so much controversy, pro and con, was the handiwork of the UN Subcommission for the Promotion and Protection of Human Rights, made up of 26 independent human rights experts. A U.S. academic, David Weissbrodt, professor of law at the University of Minnesota, was the expert most responsible for researching and drafting the Norms.

Polarization, human rights organizations vs business, doomed the Norms, but not the basic idea behind it. Three years ago (in April 2005) UN Secretary-General Kofi Annan appointed Professor John Ruggie of Harvard to carry on what is essentially the same project. His mandate includes “identifying and clarifying standards of corporate responsibility with regard to human rights.”

Where to find those standards? Weissbrodt culled them from three dozen UN treaties and other international instruments, including ILO conventions and recommendations. Ruggie started by looking elsewhere. He commissioned a study of 320 cases of alleged corporate-related human rights abuse reported on the website of the Business and Human Rights Centre during a 33-month period that ended in December 2007. He then had each case coded for the rights the alleged abuses impacted from among those listed in seven key UN human rights documents, including the four core worker rights conventions of the ILO.

Ruggie’s empirical study identified 12 labor rights and 17 non-labor rights. That means “there are few if any internationally recognized rights [that] business cannot impact – or be perceived to impact – in some manner.” Ruggie’s conclusion: there are no limits to the rights that companies “should take into account.” On this basis, he judges that the Norms would be inadequate, even for protecting a corporation’s own interests, since they identify only “a limited set of rights for which [a corporation] may bear responsibility.”

As a result, in the report that will be considered at the June session of the Human Rights Council, Ruggie lays a heavy human rights burden on corporations. Part of it is the moral and legal responsibility of exercising "due diligence."

“To discharge the responsibility to respect [human rights] requires due diligence,” Ruggie emphasizes. One of his specific recommendations is that companies should look for guidance in the Universal Declaration of Human Rights and the core worker rights conventions of the ILO. “The principles they embody comprise the benchmarks against which other social actors judge the human rights impacts of companies.”

Drawing on his recent research and consultations, Ruggie sets down four elements of a company’s basic due diligence process:

Written policies: To give the aspirational language meaning, more detailed guidance in specific functional areas is necessary.

Impact assessments: Many problems arise because companies fail to consider the potential human rights implications before new activities are launched. After getting launched, activities should reviewed on an on-going basis.

Integration: Isolating human rights considerations in a company is a mistake that can lead to inconsistent or contradictory actions by product developers, lobbyists, sales teams, or procurement officials. Leadership from the top is essential to embed respect for human rights throughout a company.

Tracking performance: Monitoring and auditing processes are needed to get updates of human rights performance. Confidential channels, such as hotlines, can provide useful feedback.

How will organized business react to Ruggie’s ambitious new framework? No explosion so far. Nobody should be surprised by this report, though. In his speeches, interviews, and previous reports, Ruggie has been clear about where he was heading. His style throughout the past three years has been a model of openness as he went about

-- convening 14 multi-stakeholder consultations on five continents.
-- initiating more than two dozen research projects, some with the assistance of global law firms and other legal experts, nongovernmental organizations (NGOs), international institutions, and committed individuals.
-- generating more than 1,000 pages of documentation as the foundation of his framework.
-- receiving about 20 formal “submissions” (comments) from governments and other stakeholders..
-- presenting two extensive reports on his mandate to the Commission on Human Rights and its successor, the Human Rights Council [in 2006 and 2007], prior to this one]

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Multinationals, Human Rights, and UN - I

As the United Nations prepares to celebrate the 60th anniversary of the Universal Declaration of Human Rights this December, a report commissioned by the UN is challenging governments and business to focus on corporate-related abuses of human rights.

Titled “Protect, Respect, and Remedy: a Framework for Business and Human Rights,” the just-released report is on the agenda of the UN Human Rights Council’s June session in Geneva. Its author, Professor John Ruggie of Harvard, is the Special Representative of the UN Secretary General on the issue of human rights and transnational corporations.

His report describes and endorses “ways to reduce or compensate for the governance gaps created by globalization, because they permit corporate-related harm to occur even where none may be intended.” Governance gaps? It is a key concept of the report. Ruggie defines it as the vacuum “between the scope and impact of economic forces and actors, and the capacity of societies to manage their adverse consequences.” He goes on to explain what it means in one crucial area.

“Take the case of transnational corporations,” he writes, and goes on to illustrate how the gaps have evolved under recent globalization:

[Corporate] legal rights have been expanded significantly over the past generation. This has encouraged investment and trade flows, but it has also created instances of imbalances between firms and States that may be detrimental to human rights. The more than 2,500 bilateral investment treaties currently in effect are a case in point.

While providing legitimate protection to foreign investors, these treaties also permit those investors to take host States to binding international arbitration, including for alleged damages resulting from implementation of legislation to improve domestic social and environmental standards – even when the legislation applies uniformly to all businesses, foreign and domestic. A European mining company in South Africa recently challenged that country’s black economic empowerment laws on these grounds.

At the same time, the legal framework regulating transnational corporations operates much as it did long before the recent wave of globalization. A parent company and its subsidiaries continue to be construed as distinct legal entities. Therefore, a parent company is generally not liable for wrongs committed by a subsidiary, even where it is the sole shareholder, unless the subsidiary is under such operational control by the parent that it can be seen as its mere agent.

Ruggie gives examples of how “the transformative changes in the global economic landscape” are not reflected in current laws, regulations, and bureaucratic procedures. Also vital in contributing to the governance gaps is the reluctance of the host and home countries to risk taking on the transnationals.

“This dynamic is hardly limited to transnational corporations,” Ruggie adds. “To attract investments and promote exports, governments may exempt national firms from certain legal and regulatory requirements or fail to adopt such standards in the first place.”

Under international law, Ruggie points out, “States have a duty to protect against human rights abuses by non-State actors, including business, affecting persons within their territory or jurisdiction,” as also discussed in his earlier (2007) report on his mandate. In this report he finds that “there is increasing encouragement at the national level for home States to take regulatory action to prevent abuse by their companies.”

Here, in opening a long section on “the state duty to protect,” Ruggie makes an implied criticism of human rights experts. “Within governments and beyond,” those experts have a good understanding of the “general duty” of States to protect human rights. But “less internalized is the diverse array of policy domains through which States may fulfill this duty with respect to business activities…at home and abroad.”

In other words, governments have available human rights tools that often remain unused or under-used. Ruggie devotes five pages to them. He urges viewing them as “an urgent policy priority …necessitated by the escalating exposure of people and communities to corporate-related abuses, and the growing exposure of companies to social risks they clearly cannot manage adequately on their own.” Three examples:

-- Revising international investment agreements to ensure that the rights protecting investments abroad are balanced with responsibilities to respect the host country’s domestic environmental and social standards.
-- Adopting policies more proactive in preventing harmful corporate involvement in “conflict zones,” including the use of Security Council-approved sanctions as appropriate to each situation.
-- Redefining fiduciary duties, as the UK recently has done, to require corporate directors to “have regard” to matters such as “the impact of the company’s operation on the community and the environment.”

In concluding his special section on the State duty to protect human rights, Ruggie reaffirms: “The human rights regime rests upon the bedrock role of States. That is why the duty to protect is a core principle of the business and human rights framework. But meeting business and human rights challenges also requires the active participation of business directly.”

He then turns to his second principle, the corporate responsibility to respect human rights. So will I, in my next posting.

4/21/08
Reporting on the Ruggie Report - I

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The Latest on Business and Human Rights

What are the steps that governments could take to bring multinational corporations fully under the rule of law? That paraphrases one of the controversial questions that Professor John Ruggie of Harvard will answer in a report that he has prepared as the Special Representative of the UN Secretary General on Human Rights and Business.

The report, which will be considered by the June meeting of the UN Human Rights Council in Geneva, is expected to be released in the next week or two. Though it won’t make a splash in the media, it is eagerly awaited by many business people and human rights types.

I have been following, and writing about, the controversy ever since it exploded in the former Human Rights Council (then called a commission) when an advisory group of experts published a document entitled “Norms on the Responsibilities of Transnational Corporations with regard to Human Rights,” or Norms for short, in 2003.

The proposed Norms, distilled from UN treaties and agreements, met sharply divided reactions. At one extreme, leaders of organized business strongly opposed them, mainly because they seemed to be obligatory. At the other end, many human rights people (including me) generally favored them as a way to balance the global rights of business with some matching responsibilities.

Professor Ruggie was appointed in July 2005 to resolve the controversy. A political scientist wise in the ways of humans, societies, and the UN, Ruggie has succeeded in calming tempers. For nearly three years now, he has been vigorously proactive, talking with all groups having a stake in the controversy, persuading many of them to comment in writing, arranging for authoritative reports on specific points, and publicly communicating his approach in a series of speeches and articles. One of his first acts was to bury the term “Norms,” which had become overburdened with emotions.

A by-product of Ruggie’s openness and transparency is that the complex issues involved are now on the public record, thanks to an archive maintained by Business and Human Rights Resource Center, headquartered in London with offices in Hong Kong, South Africa, and the United States, and world accessible through a voluminous Website.

So we can already know where Ruggie stands on most points at which business and human rights intersect. Most refreshingly, his stance is one that recognizes the complexities of his project, and does not oversimplify them with easy slogans appealing to one side while infuriating the other.

At an international business forum held at the World Bank last October, Ruggie discussed his perspective on business’s twin roles as rule makers and what he calls “rule takers.” Here is an excerpt from his remarks, lengthy because his insights are not easy to summarize and because they tip off what will almost certainly be a major aspect of his upcoming report:

Business already is deeply involved in global governance—quite apart from its influence on individual governments. Employers associations, along with labor, have been constitutionally represented in the ILO since 1919. Today, business participates as a rule maker in such diverse areas as setting global telecommunications standards and protecting intellectual property rights.

Through bilateral investment treaties and host government agreements, companies can seek to insulate their direct foreign investments from future legislative or regulatory changes in host countries, including policies that promote human rights. And they are able to proceed directly to binding international arbitration, bypassing the host country’s courts, if they believe that their investments are adversely affected by such regulatory changes.

But while business has become a direct participant in the system of global governance, it has proven a far greater challenge to render it subject to international rules for harms committed abroad—to make business a global rule taker, in other words. For example, a parent company generally is not legally liable for wrongs committed by an overseas subsidiary, even where it is the sole shareholder, unless the subsidiary is under such close operational control by the parent that it can be seen as its mere agent. And sourcing goods and services from contracted suppliers generally is considered an arms-length market exchange, even for sole suppliers, not a related-party transaction.

To be sure, each legally distinct entity within a corporate group or network is subject to the laws of the countries in which it operates. But host country governments and courts often are unable or unwilling to confront major global corporate players. And the group or network as a whole is not governed directly by international law.

In short, we see an emerging trend whereby business as rule maker increasingly operates in a single global economic space; but business as rule taker largely continues to operate in the world of separate national jurisdictions, with only a thin overlay of relatively weak international institutions and legal instruments.

In the area of human rights, the main bridges between these two worlds are lawsuits where they are permitted, thus far primarily under the US Alien Tort Claims Act; “naming and shaming” campaigns by NGOs; and self-governance or multi-stakeholder initiatives that corporations adopt voluntarily.

To put it simply: we need stronger bridges. History suggests that such a pronounced divergence between rule maker and rule taker may not be politically sustainable—that pushback against globalization driven by increased populism, protectionism and various forms of fundamentalism is likely to occur unless ways can be found to establish more effective transnational means of governance, covering all key international players, including business.

Many who speak for victims of corporate related human rights abuses have advocated drafting a binding international legal instrument as their preferred answer. But let us recall that the recently adopted United Nations Declaration on the Rights of Indigenous Peoples was twenty-two years in the making—and it is not now, nor will it soon become, a legally binding treaty. So whatever long-term aspirations one has, and however meritorious they may be, victims cannot wait a quarter century—they need help now.

My own approach to this challenge is to build up from what we’ve got—and aim to close “law free” zones where they exist.

Call that a carefully charted path between opposing arguments. It is more accurate, I believe, to say that Ruggie is trying to establish a common ground -- a new paradigm -- for business and human rights that the corporate world would be wise to recognize. His upcoming report promises to outline a major step in that evolving process.

Many people see no need for such a new paradigm for business. They accept the prevailing paradigm as a good one, subject perhaps to some tinkering, but essentially the best achievable, at least for this generation. Naturally, they oppose Ruggie’s enterprise and any cooperation with it.

But many others, although agreeing that the prevailing paradigm does not promote an inclusive globalization, contend that Ruggie’s paradigm is unsatisfactory for one reason or another. They, too, can make a contribution by presenting a paradigm that might be better.

For me this is not a one-time story, but a developing one with dramatic consequences for the future, whichever way it goes. I’ll be following it closely. So keep tuned to Human Rights for Workers Too by bookmarking http://humanrightsforworkers.blogspot.com/. See you there again soon.


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