What is the current international regulatory regime for multinational companies (MNOs)?

MNOs have grown tremendously since World War II, but international legislation is yet to catch up. Currently, the international regulatory framework remains fragmented, creating a huge gap between legality and reality. Although the day-to-day activities of MNEs are governed by national laws, their multinational character requires a more coordinated and efficient multilateral approach.

Current international regulations can be summarized into five categories as follows:

1. Informal regulation

Since the 1980s, non-governmental organizations (NGOs) have had a tremendous impact on MNO operations, following them closely and lobbying furiously with governments. Some MNOs have self-regulated in the interest of society.

2. Soft regulation

This is a new type of regulation that has emerged over the past two decades and essentially shames companies to voluntarily accept certain restrictions in response to criticism, best practice guidelines and disdain for less developed countries (LDCs). Much confidence has been placed in the effectiveness of such soft regulations. Although they are called “soft,” as Peter Munchinski puts it, they can be hardened into a positive law.

Soft regulation mainly works in the areas of labor / human rights, environmental protection and corporate governance. MNOs do not follow these guidelines out of altruistic concern, but rather to strengthen their public image.

3. Bilateral treaties (BITs)

There is an abundance of BITs that influence MNE activities. These documents have been prepared between two states that wish to regulate MNE activities affecting their countries. In reality, however, most BITs serve to protect host investors ‘rights by limiting host countries’ control over foreign subsidiaries.

Developed countries use BITs to favorably treat their investors in host countries. BITs usually include “national treatment” and “most favored nation” clauses to achieve this goal.

In addition, most BITs oblige host countries to adequately and promptly reimburse expropriated investments, waive their right to impose obligations on MNEs to deploy local labor and use local equipment, and to allow them money and profits countries to be transferred back to their home at a market exchange rate.

In addition, most BITs include a binding arbitration clause whereby foreign investors can sue the host government.

A positive aspect of the BITs is that it prevents the MNOs from playing the signatories against each other. However, as Muchlinski points out, this is impossible if there is no equality of bargaining power in the negotiations.

As Kenneth Vandevelde rightly pointed out, the BIT movement as a whole can be seen as part of an ongoing process to create a new international foreign investment law to meet the demands of the new global economy … While the world relatively extensive legal structure for trade [in the GATT and WTO institutions]… it has yet to create a comparable structure for international investments.

Despite the large and increasing number of BITs, the question is whether BITs have been effective in promoting an efficient, liberalized investment market worldwide.

4. Regional treaties

Nations around the world are choosing regional integration as a way to gain political power, liberalize trade and accelerate industrialization.

The most powerful organizations are between industrially developed countries, but the LDCs have also made a few attempts.

4.1. North American Free Trade Agreement (NAFTA)

NAFTA is a free trade agreement between the US, Canada and Mexico, modeled on the existing Canada-US. Free trade agreement (FTA). It provides a balanced and stable regulatory system for the MNEs.

However, NAFTA has many enemies who blame it for the deregulation of international trade. It is true that MNOs enjoy unprecedented protection, unrestricted right of movement of capitals, goods and services under NAFTA, at the expense of workers ‘or farmers’ rights.

Chapter 11 of NAFTA provides for binding arbitration as a dispute settlement mechanism between MNOs and member governments. Critics argue that taxpayers are punished for the benefit of companies and that countries are unable to regulate for the sake of public health, safety and well-being. This extraordinary attack on the sovereignty of the states has led to new proposed agreements, such as the Central American Free Trade Agreement (CAFTA) and agreements with Peru, Panama and Colombia.

While the opponents accuse NAFTA as socially irresponsible, the champions rightly argue that companies’ ability to resort to binding arbitration is nothing new, in fact, it has been around in BITs for a long time. However, this argument has been made up, especially given the increasing number of lawsuits by MNOs.

For example, Canadian Farmers have sued the US for Fair Trade. to recover $ 300 million for the suspension of Canadian livestock imports following the discovery of mad cow disease in Alberta. Although the case never saw the light of day, critics delayed declaring that “[b]and by entering into NAFTA, the United States no longer has the right to protect its domestic livestock industry from contamination. “

In 1996, Metalclad Corporation sued the Mexican government when the municipality of Guadalcazar refused to allow it to reopen a waste treatment facility. In 2000, the arbitral tribunal awarded the company $ 16.7 million in compensation because local environmental laws that constructed the company’s toxic waste treatment plant amounted to expropriation.

The Canadian government was forced to lift restrictions on the production of a gasoline-based ethanol-based additive it deemed dangerous after a US manufacturer said the ban harmed its company.

United Parcel Service, the parcel delivery company, has filed a complaint stating that the existence of the government-funded Canadian postal system represents unfair competition that violates Canada’s obligations under NAFTA.

Critics claim that NAFTA violates the sovereign immunity of nations and treats MNOs “as [..] the same subject of international law, comparable to governments. The irony is that companies cannot prosecute their own governments, which means that foreign investors are treated more favorably than the national investors of a Member State.

NAFTA is an important organization that has helped companies thrive. However, the future is uncertain, especially since the election of a publicly critical new U.S. President in 2016.


ANCOM is a customs union established in the Cartagena Agreement signed in 1969 between the South American countries of Bolivia, Colombia, Ecuador, Peru and Venezuela, until the withdrawal in 2006 – in order to ensure a balanced and harmonious development of the Member States through the elimination of internal tariffs, the adoption of a common external tariff and the harmonization of economic and trade policies.

ANCOM was the longest disorganized. Members believed that foreign investment weakened local business, which is why they adopted a common code for the treatment of foreign investment (decision 24) to limit foreign investment.

ANCOM members have continuously violated their agreement, but enforcement against offenders was impossible because the agreement lacked a dispute settlement mechanism. The Andean Court of Justice was only established in 1983.

Decision 24 was replaced in 1987 by “Decision 220”. ANCOM eventually became operational after the establishment of a free trade area in 1993 and the Customs Union in February 1995. Today, all goods circulate tax-free within the sub-region.

ANCOM still has to overcome obstacles before it can become a major economic power in the world, such as the European Union or NAFTA.


The EU is a political and economic union of 28 countries with a complex web of laws that regulate MNOs, such as international market law, international and European food law, global administrative law, export / import controls (including EU dual-use regulation), Economic sanctions , anti-corruption and money laundering, data protection, investment barriers, trade, competition and disputes.

EU states have cured their grievances since the two world wars. The Union won the Nobel Peace Prize in 2012 for promoting peace and international cooperation. It is known for its economic / political stability and strong commitment to human rights and due process of justice. The Copenhagen criteria for EU membership require commitment to human rights, the rule of law and the market economy.

5. Multilateral treaties

5.1. Multilateral instrument binding

The first binding multilateral rules appeared in 1995 when the Uruguay Round of Multilateral Trade Negotiations (MTN) entered into force. The MTN led to the creation of the WTO and GATT became part of the WTO agreements. Subsequently, the Agreement on Trade Related Investment Measures (TRIMs) was incorporated into the WTO.

5.2. Failed attempts

5.2.1. UN Code of Conduct for Transnational Enterprises

About 40 years ago, ITT became involved in Chile’s internal politics and caused the overthrow of President Salvador Allende. The issue became the subject of hearings on the Church Committee of the United States Congress. President Allende made a speech to the United Nations General Assembly in 1972, drawing international attention to the “economic power, political influence, and corrupting action” of the MNOs. Following the turmoil, the United Nations Center for Transnational Enterprises (UNCTC) coordinated the drafting of the UN Code of Conduct for Transnational Enterprises with a view to establishing a multilateral framework for the rights and obligations of MNEs and host countries. Negotiations faded in 1990.

The failure of efforts was attributed to the conflicting agendas of the following three interest groups:

• LDCs favored regulation under national laws, fearing that MNOs would violate their sovereignty. Because they did not invest outwardly, they ignored investor rights.

• Socialist countries did not allow incoming foreign direct investment. They refused to allow their multinational companies to be controlled under a multilateral code.

• The developed countries already had a system in place to protect their MNOs. Their only reason for negotiating a multilateral agreement was their desire to prevent the least developed countries from compromising the standards of customary international law.

5.2.2. The multilateral investment agreement (MAI)

The developed countries wanted to combine the strongest features of the existing BITs and other regional schemes in one document.

Negotiations lasted until 1997 without public notice, until a leaked copy of the draft reached an NGO accusing it of representing the interests of investors “far above those of governments, local communities, citizens, workers and the environment”.

MAI was attacked as an attempt to “multiply corporate power over governments and eliminate policies that could limit the movement of factories and money around the world. [NGOs argued the document] puts corporate profits above all other values ​​”and” endangers democracy “.

Critics also argued that Article 2.1, which states that “a Contracting Party does not directly or indirectly expropriate or nationalize or take measures having equivalent effect, an investment in its territory from an investor of another Contracting Party” would prevent individual governments from adopting laws those MNOs make a profit.

It has been argued that “environmental, health or worker rights legislation that could threaten profits could be interpreted as” expropriation “and prohibited by the treaty”

Another criticism was that the “[MAI empowers] companies and investors to sue governments directly for cash compensation, in retaliation for almost any government policy or action that undermines profits. The opponents cited the $ 251 million in damages brought by the US-based Ethyl Corporation’s against the Canadian government where the Canadian Parliament banned the company from an Ethyl-produced fuel additive for environmental and health reasons, the company sued and alleged that Canada had breached its NAFTA obligations.

The design was abandoned in 1998. The real reason for its failure remains the subject of controversy. One view is that the negotiators had many unresolved issues, such as excluding certain sensitive sectors from the negotiations, for example Canada and France wanted to exclude cultural industries. Another view is that the NGOs downed the MAI. “When a negotiator says something to a glass of wine, we have it all over the world on the Internet within an hour,” said Maude Barlow, president of the Council of Canadians, a civil society interest group. The MNOs have not called for a new multilateral agreement fearing the reactions of NGOs. They prefer to remain unobtrusive while taking advantage of the restored coverage of the BITs.


It is clear that MNEs are likely to continue to mushroom. They have successfully spread their activities and amassed enough power and money to bully every single country. As some of their critics have rightly pointed out, the unique mission to make a profit has turned some MNOs into sociopaths. They have avoided taxes, broken labor rules, polluted the environment, carried out immoral activities, all with impunity.

The existing national and international bodies are simply not equipped to cope with the expansion of international trade. The obvious solution is to come up with an efficient and coordinated mechanism to monitor MNE activities through binding and enforceable multilateral instruments.

The previous attempts have generated the same criticism as NAFTA (although the offensive clauses went unnoticed in BITs). New multilateral instruments must draw the full attention of stakeholders. They must balance the interests of the host countries and those of the MNEs while listening to NGOs. They must design a dispute settlement mechanism that will be designed and implemented to balance private rights and public goods in a legitimate and constructive manner. Such mechanisms should discourage frivolous litigation by MNEs and regulate governments in the interests of public health and safety.

Finally, on the internet day, making contracts behind closed doors is no longer realistic. A greater number of groups should be invited to negotiate and more attention should be given to how non-negotiators and the public would prepare these documents.

Source by Laura Reynaud