PART I:
If you asked me whether the FTAA – as drafted – will have an affect on the Bahamas, or what affect it will or may have, I shall be honest and say, I cannot say, and no one else can. Having said that, we may always look to precedents and experience for guidance. When people ask about Affect or impact, what they really mean is what is going to change and am I able to cope with it or even thrive under it?
To the question then: In my view, the answer to the question of the whether the FTAA will have an affect on the Bahamas is YES and NO.
Generally speaking: YES, because any new arrangement will do so. And NO because we already do most of what the FTAA requires insofar as open boarders are concerned.
The main question that people ask is about the possible “Walmartification” – with apologies to English teachers – of the Bahamas. First, we were reliably informed that they are already here in the Bahamas.
Example:
The fact is since April, 1967, Winn Dixie (the Wal-Mart of the 70s), has been in The Bahamas – and over the past 35-years, we have enjoyed the presence ‘locally owned’ food giants: Super Value, Costrite, Centreville Supermarket, Abaco Markets, Solomon’s, Budget Markets and a host of substantial Wholesalers, the likes of Asa Pritchard, Thompson Trading, Lightbourne Trading, Island Wholesale and hundreds of Mom and Pop convenience stores owned 100% by Bahamian Nationals are doing just fine. We have already had ‘globalization’ working in our midst for 35-years and we have competed even though US giants like Home Depot in Florida, selling to Bahamians, do over US$10 million annually, pay not one cent of Bahamas Tax, and is in direct competition with Kelly’s Lumber, City Lumber, John S. George. Yet we do substantial business here in the Bahamas in the face of abominable rates of custom’s duties.
The Difference:
However, there are some changes that will make this process of competition different than its was before. I will come to that in a few minutes. The other reason for not fearing “Walmartization” is that given the South American labour markets and the fact that American business will be able to entre Cuba in 5 years (Tourists in two years), large investors are not coming here. We are too expensive, with low productivity, bad attitudes as our own government survey shows, we have too much red-tape, and no comparative economies of scale, and we suffer from a shocking sense of entitlement.
(This paragraph is VERY Important !!!)
(Repeat) Secondly, the things we have chosen to worry about – land sales and bricks and mortar investments, shows that we are outside the framework of 21 century business imagination. In the coming years, we shall laugh at the fellow who buys up huge plots of land, because the money being made is in “virtual properties”. If you think me mad for talking this way, Australia made 3 billion dollars in selling electronic legal & Arbitration services in 2000. Finland grow its economy five fold in 9 years by selling “know how”.
Some people ask whether the FTAA is an Americanization of the region. My answer is YES. But I do not find that strange or difficult. Large nations create hegemonyﾅThe Monroe Doctrine of 1823 – which was meant to keep Europe from meddling in the Americas, if still inferred today in respect of European relations with Cuba.
The Next Question is FTAA a “done deal”? Well, not quite. The ‘wild-card’ is Brazil. A little history oftentimes gives clarity:
Example:
In 1807-08, during the Napoleonic Wars, King John VI of Portugal took refuge in Rio de Janeiro. Brazil, now the seat of government for its mother country, witnessed tremendous economic growth. Life was so good in Rio, that after Napolean had been defeated, the Royal family stayed on until a threatened revolt in Portugal forced John VI to return to Lisbon. Popular pressure in Brazil compelled his son, Dom Pedro, to declare Brazil independent in 1822, and so Brazil became an Empire with a monarchy, while the rest of North and South American became republics.
As such, the Brazilian establishment sees its future in Europe, and will not play second fiddle to Canada and Mexico for American attention. Without Brazil, there can be no FTAA.
Having given some quick answers to generally asked questions Let me end with what I think will have a profound affect on the Bahamas.
PART II:
An Emerging Global Investment Framework:
A global legal framework is emerging, limiting the powers of government to ensure Investor Protection as a sort of economic constitution. Some scholars say the framework is designed to limit the powers of sub-national government in countries with a federal system. However, it may have the effect of limiting government in any event. Several existing WTO agreements already limit domestic purchasing power and economic development practices.
We may better understand these initiatives if we understand the history behind them: The investment chapter of the Free Trade Area of the Americas (FTAA) – which is supposed to replace NAFTA by the year 2005 – is really The Multilateral Agreement on Investment (MAI), which was being negotiated within the Organization for Economic Cooperation and Development (OECD). After these negotiations broke down in late 1998, the European nations proposed moving the process into the next round of WTO negotiations, beginning November 1999. NAFTA adopted part of the MAI model, and the draft FTAA investment chapter carries a fuller representation of the original draft of the MAI.
This includes the infamous chapter empowering foreign investors to sue national governments if public policy nullifies the investors’ expectations of profits. The draft agreement carries a number of prohibitions:
ﾨ It prohibits subsidies that provide direct financial assistance to a company or sector in a way that is linked with export promotion or losses, unless the foreign investor is given the same.
ﾨ Subsidies can be challenged if the complaining country can prove that the subsidy places one of its businesses at a competitive disadvantage.
ﾨ The Draft requires countries to purchase goods and services based only upon price and performance criteria. Many of our domestic purchasing policies could be challenged as violations of performance-based rules.
ﾨ To name just a few, these include small business preferences or assistance, buy-Bahamian/buy-local preferences. Governments will likely have to disclose their purchasing policies at all levels.
The negotiations on foreign investor protection involve the most far-reaching limits on the constitutional and so sovereign authority of member-states and their governments. This is because:
(1) the agreements provide more protection for investors than exists under constitutional law,
(2) they privatize the enforcement process by enabling investors to seek monetary damages from national governments.
(3) Several NAFTA cases are already in the works on matters of land use, fresh water exports, transportation of hazardous waste, and punitive damages. Investment agreements are being negotiated in several forums. The NAFTA cases have stimulated creation of a high-level working group on “interpretation” of the basic investor rights that have spawned these cases.
PART II:
The Legal History:
The general purpose of MAI is to protect foreign investors from government policy that might:
(1) place them at a commercial disadvantage (compared to domestic firms), or
(2) impose a significant burden on their ability to manage or profit from an investment (regardless of how they compare to domestic firms).
The MAI is therefore a direct challenge to “sovereignty,” the power of a nation-state to govern without external limits. The MAI seeks to create a bill of rights for investors in the sense that it limits the governing power (or sovereignty) of participating nations. It does this by empowering foreign investors to challenge the law-making authority of nation-states through a dispute resolution process.
The MAI’s span is universal; it covers all “assets of any kind.” This includes, among other assets, an enterprise, ownership shares or stocks, contract rights, and property rights – including leases, intellectual property, tangible property, and of course, real property. The MAI provides 14 types of investor protection in two basic categories:
First, it does not allow governments to discriminate against foreign investors in relation to domestic investors for any purpose. The main “relative” standards of protection are “National Treatment” and MFN, or “Most-Favored Nation” Treatment.
Second, in addition to protecting foreign investors from explicit discrimination, these standards also protect investors from “de facto” discrimination, which means a law that places them at a competitive disadvantage, even though the law is not facially discriminatory. Examples of laws that would violate National Treatment include:
ﾷ Residency requirements for casino licenses and “buy-Bahamian/buy-local” schemes, tariffs or procurement preferences. These violate National Treatment because they explicitly discriminate against foreign investors. The fact that they serve a legitimate purpose under Bahamian constitutional law is not relevant for purposes of National Treatment under the MAI.
ﾷ Small business procurement preferences or subsidies. Even though they do not explicitly discriminate against foreign firms, the measures amount to de facto discrimination because foreign investors are not likely to qualify.
A second set of 12 investor protections is “absolute” in that it protects foreign investors, even if domestic investors are treated exactly the same way. These protections include limits on “performance requirements” (such as export performance or a requirement to use domestic firms or domestic content) and a mandate to compensate foreign investors if the government “expropriates” their property, which is like compensation for taking property in the Bahamas. In certain cases, acts of government, which may be lawful, but affects the foreign investor negatively will amount to expropriation and the investor can seek compensation.
The broadest investor protection is called “General Treatment.” It requires government to treat foreign investors “no less favorably” than under principles of international law, which are less defined, by far, than comparable principles of Bahamian constitutional law.
General Treatment also enables a foreign investor to seek damages if a government impairs the use, management, operation, enjoyment, or disposition of an investment. If a law violates any other MAI provision, it is also likely to violate General Treatment. There are a number of examples of laws or practices that violate the MAI’s absolute investor protections.
ﾷ Environmental regulations such as wetland or coastal zone restrictions could be challenged as a partial expropriation of an asset without compensation. This could lead to “cherry-picking” In addition, an investor could more easily argue that the same environmental regulations also “impair” the enjoyment or operation of an investment, although the award of damages might be less than under expropriation.
ﾷ Community reinvestment acts and “first source” hiring agreements linked to permits are prohibited “performance requirements” because they mandate use of local content, workers, or business relationships. The MAI does permit a number of other performance requirements, such as building a factory or hiring local workers, but only if the government provides a subsidy to the investor. Apparently, we do this already.
ﾷ Large punitive damage awards are being challenged in the first NAFTA case against the United States. The FTAA may therefore affect our law of Torts. A Canadian corporation is currently arguing that under NAFTA the standard of “fair and equitable treatment” under international law does not permit local juries to impose punitive damages based on the size of the company (rather than a small multiplier of actual damages) in order to deter fraudulent practices. The comparable MAI provisions for General Treatment are much broader than this NAFTA standard. As such, if the Bahamas government sues a company for let us say, an oil spill, it may find itself limited in the damages available or even counter sued for expropriation.
VERY IMPORTANT !!!
Conclusion:
There are other issues here. What we ought really to be concerned about are the e-Commerce and intellectual property provisions as a feature of investment. I mean, to be able to compete in FTAA, e-Commerce and Intellectual property, laws, skills and infrastructure will have to have developed to a high degree. But there are more powerful questions here than we have been prepared to ask: First, who amongst us believes that our students and the institutions responsible are prepared for the coming world ?
Second, we hear lots of talk about e-Commerce. But it is utterly useless unless we actually have some skill or “know how” which the world wants to buy. For instance, I gave the example of nursing. We complain that the US is taking our nurses. However, they require 3.2 million of them in the South West United States alone in the next four years.
We should partner with a world renowned nursing school. Go to the various hospitals in the South West region and contract to provide them with some many nurses per year. 10,000.00 nursing students at approx. $6,000.00 a year is 60 million dollars. Double that for expenses, room and board and it 120 million dollars in foreign currency for the Bahamas. But first, we have to prove excellent at it. Second, it opens up e-Commerce opportunities, because when these nurses return home we can sell them further training over the internet. That is how it is done today. This is the new business model. But before we can play, we must be honest: what do we do as well as Microsoft makes software or Mercedes Benz makes cars ? If we cannot answer, we have more than FTAA to worry about.
A Commentary by
Gilbert NMO Morris
Gilbert Morris Associates LTD
At the 4th Annual Bahamas Investment Conference
October 19, 2002
