Red Flags for Multinational Business

Don’t get involved in mass programs to force people to move from their communities.

That piece of advice is so obvious that it hardly seems worth flagging for the attention of executives of multinational corporations. But there it is, number one on list of nine “red flags”for business on how to act responsibly in the many “high risk” areas of the global economy.

Launched at a seminar in London on May 23, the “red flags” initiative seeks to alert corporate executives to changes in the law and in the expectations for complying with it. The initiative identifies the increased liability risks for companies operating internationally, particularly in high-risk zones.

Each of the nine “red flags” listed on the initiative’s website has a summary of the relevant laws (domestic and international) and a relevant court case or two. The topmost redflag, for example, explains: “The threat or use of violence to force people out of their communities can be a crime under international law.” A court in Japan is hearing a lawsuit against a Japanese company charged with involvement in forced resettlement of people in Indonesia prior to construction of a dam.

Take these other “red flags”:


“Providing the means to kill.” A court in the Netherlands imprisoned a Dutch businessman for allegedly providing chemicals that the Iraqi military used against Kurdish civilians in 1988. An appeals court upheld the conviction and increased the sentence to 17 years.

“Allowing use of company assets for abuses.” The liability exists even if the company did not authorize or intend illegal use of company property, for example. In a case pending in U.S. courts, Indonesia villagers charge that Indonesian armed forces protecting the company’s facilities tortured them on company property.

“Handling questionable assets.” Handling, managing, or hiding funds associated with criminal activities exposes companies to prosecution and lawsuits. In 2005, an American bank pled guilty and paid a $16,000,000 fine to clear up criminal charges covering suspicious transactions involving the assets of Chilian dictator Augusto Pinochet.

Two international NGOs, International Alert, and the Fafo Insitute, formally launched the Red Flags initiative, after months of preparatory work by an informal group of lawyers, researchers, and diplomat of several countries, including the United Kingdom and Canada.

They have spotted a trend whereby national laws are gradually becoming tools for protecting human rights worldwide. “When it comes to human rights abuses, the law-free zones are shrinking,” says an informative article in TheLawyer.com.

But the "law-free" zones still are huge in number and size, so much so that navigating within them is perilous for multinationals. I am not a multinational executive myself, but I understand why some of them favor adopting a set of rules that fill in the lawless areas.

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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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